The Different Kinds of Stocks

Stocks comes in two main kinds: Common and Preferred.

Common

Common stock is called this because it is, in fact, common. Most of the time, when people discuss the stock market, they are talking about common stock, as the majority of shares sold are the common kind. The last section highlighted common stock more than it did preferred stock.

As explained previously, owning common stock shares indicates that you own part of the company, and have a claim on a slice of the profits. Additionally, you are entitled to voting in board elections.

This common stock typically has a higher return than other kinds of investments, but that higher return has the most risk associated with it. If the company files bankruptcy and has to liquidate, you are only entitled to what is left over after creditors, bondholders and the preferred stockholders are paid.

Preferred

Like Common stock, Preferred stock provides shareholders with a claim to ownership, but does not usually have the same voting rights, though voting rights may be awarded by select companies.

Investors who own preferred shares, though, are guaranteed a set dividend payout forever. Common stocks, with variable dividends, are never guaranteed. Additionally, if you own preferred shares and the company goes through liquidation, your shares are paid out before the common shares (though, still after the creditors).

Also, the company may have the option to buy the shares back from shareholders at any time, which is called being callable. If this happens, the company usually pays a premium for those shares.

It may seem like preferred stock is more similar to debt than equity. However, it falls somewhere in the middle, kind of between common stock and bonds.

Different Classes

While common stock and preferred stock are the two used most often, there are other options available, including customization of stock. Commonly, companies do this because they want to keep the power to vote with a specific group, so they would create different classes, who would have different rights. An example of this is when one class of stock entitles a small group of people to multiple votes for every share they own, while the majority of holders are only entitled to one vote.

In the event that more than one class of stock is available, they are typically designated as classes A and B. For example, the large real estate company called Berkshire Hathaway provides two classes. The designations for these two classes are seen in the ticker symbol. Berkshire Hathaway class A would be denoted as “BRKa” or “BRK.A” and class B would be denoted as “BRKb” or “BRK.B.”