Common stock is, well, normal. That’s what people are talking about when they talk about stocks in general. In fact, most stocks are issued in this form. We basically looked at the characteristics of common stock in the previous section. Common shares represent ownership and a claim (dividend) on a portion of profits in a company. Investors get one vote per share to choose board members, who oversee key decisions made by management.
Over the long term, common stock, through capital growth, yields higher returns than nearly every other investment. This high return comes at a cost because common stocks carry the highest risk. If a company goes bankrupt and is liquidated, common shareholders will not receive money until creditors, bondholders, and preferred shareholders are paid.
Preferred stock represents some degree of ownership in a company but does not usually come with equal voting rights. (This may vary depending on the company.) Investors with preferred shares are usually guaranteed a fixed dividend forever. This differs from common stock, which has convertible dividends that are never guaranteed. Another advantage is that preferred shareholders are paid out before the common shareholder (but still after the debt holders) in the event of a liquidation. Preferred stock can also be callable, meaning that the company has the option to buy shares from shareholders for any reason (usually for a premium).
Some people treat preferred stock more like debt than equity. A good way to think of these types of shares is to view them as a cross between bonds and common shares. (If you don’t understand Bond be sure to also check out our Bond tutorial.)
different classes of stock
There are two main forms of common and preferred stock; However, it is also possible for companies to customize different classes of stock as they wish. The most common reason for this is that the company wants the voting power to remain with a certain group; Therefore, different classes of shares are given different voting rights. For example, one class of shares will be held by a select group, who are given ten votes per share, while another class will be issued to a majority of investors, who are given one vote per share.
When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. At Berkshire Hathaway (ticker: BRK), Warren Buffett (one of the greatest investors of all time) has two classes of company. gather. Various forms are indicated by placing letters behind the ticker symbol, such as: “BRKA, BRKB” or “BRKA, BRK.B”.