Every week we deal with various write-ups that deal with stock market and finance in general.
But even as we do so, don’t we often wonder if there’s more to know about the stock market than what meets the eye?
Of course, there is!
Let’s begin by decoding the term “Stocks” in its entirity.
Understanding the term – Stocks
Simply put, a stock is a share in the ownership of a company.
They represent claims on the company’s earnings and assets.
The more stock you acquire, the greater the ownership stake becomes and vice versa.
Whether you say equity, shares or just stock, all are one and the same thing.
What Are The Different Types of Stocks?
There are two major types of stocks namely common stock and preferred stock:
Just like its name suggests, well, this type of stock is very common.
Whenever people talk about stock, they are usually referring to common stock.
Ideally, the majority of stock is issued in this particular form.
A common share represents a claim (dividends) on a fraction of profits and ownership in a company.
By virtue of being an investor, one is allowed one vote per share when it comes to electing the board of members, who are charged with the responsibility of overseeing managerial decisions.
Over the long term, common stock tends to yield higher due to capital growth returns as opposed to any other form of investment.
Of course, this higher return comes at a cost bearing in mind the fact that common stocks entail the highest risk.
If the company goes bankrupt and consequently liquidates, common stock owners will not receive their money until all creditors, preferred shareholders and bondholders are paid out.
Preferred stock stands for some degree of company ownership though it usually doesn’t come with similar voting rights.
Note that this varies depending on the company.
Usually, preferred shareholders are guaranteed a fixed dividend forever.
This is a complete opposite of common stock which offers variable dividends that are never guaranteed.
Another benefit is that during liquidation, the first people to be paid are usually preferred shareholders after which common shareholders receive their due, of course, after debt holders.
Preferred stock is sometimes callable which means that the business has the option of buying the shares from shareholders at any time for whatever reason (usually for a premium).
Some investors consider preferred stocks to be more like debts than equity.
However, the best way to see them these types of shares is through the eyes of common shares and bonds.
Different Classes of Stock
Both common and preferred stocks are the major forms of stock.
Despite this, some companies customize different classes of stock in whatever way they prefer.
The most common reason being the need to boost a certain group’s voting power.
Therefore, different types of shares are awarded different voting rights.
For instance, a select group with say, ten votes per share would hold a particular class of shares while another class would be issued to the rest of the investors (majority) who are awarded one vote per share.
How Do Stocks Trade?
Ideally, stocks trade on exchanges.
We took a quick look at the term “stock exchange” in one of our previous writings.
These Stock Exchanges are places where sellers and buyers meet and decide on prices.
In some places, exchanges are physical locations where transactions are performed on a trading floor.
You have most likely come across pictures of trading floors, whereby traders yell wildly, throw up their arms, wave and signal at each other.
The second type of is virtual and is ideally made up of a network of computers that allow electronic trading.
In the next segment of this article which you’d get to read in the upcoming week, we’ll be dealing with how stocks are traded with respect to the Indian Stock Market.
So, until then, read on!