It is likely that only those who have been living on a desert island who haven’t at least heard about the stock market. But what are these stocks and are they a good investment? There are actually a number of different types of stocks including; preferred stock, common stock, and treasury shares. We will look at each of these in turn, but first we will need to make sure that we understand what is meant by stock.
What do we mean when we talk about ‘stock’?
When we talk about stock in a financial sense we are usually referring to shares in a business. When you own a share in a business this means that you own a bit of the company; the more shares you have the more of the company you own. The benefit of owning these shares is that when the business makes money you can get a dividend and the value of shares can go up and you can sell them for a lot more money then you paid for them. So in order words when you own stock you will have a share in the company’s fortunes. Don’t be confused by the different terminology; for all practical purposes shares, equity, and stock mean the exact same thing.
What are the Different Types of Stock?
It is usual to divide stock into three types; common stock, preferred stock, and treasury shares. We will now look at each of these in turn.
Common Stock — this is also referred to as ordinary shares. If you have a common share you have voting rights and are able to decide on who gets to sit on the board of directors and other important business matters. You should also get dividends if the business is making money.
Preferred Stock — this is also referred to as preferred shares. If you have preferred stock you have no voting rights but should the company go into liquidation you should get paid before those who own common stock. You might also be entitled to a dividend that needs to be paid before those with common stock get their dividends.
Treasury shares — in the United States these are referred to as Treasury stock but this refers to something else in the UK. Treasury shares do not give you any voting rights and you are not entitled to any dividend. Treasury shares are the stock that companies manage to buy back from the market.
What is the best type of stock to invest in?
In many ways preferred stock is a safer option than common stock as an investment. Investor Chronicle (http://www.investorschronicle.co.uk/InvestmentGuides/) mentions that you should also be able to get higher dividends. This does not mean though that you can’t lose on them because you can; Directgov (http://www.direct.gov.uk ) point out that just like other shares you could lose a lot of money. If the company goes bust you could still be left out in the cold; having preference on nothing still means you end up with nothing. The main drawback with preferred stock is the lack of voting rights but if you have no interest in this then it shouldn’t be too much of a sacrifice.