Types of Stocks For Trading and Investment

In this post, we will cover the Different Types of Stocks that can be available for Online Stock Trading. In our experience, the different types of stocks confuse most new investors.  It is important to understand what type of stock you are buying, and what are the various types of stocks that a company has issued already, or is planning to issue.

Common Stock is a term that you will hear often. Anyone can purchase common stock, regardless of age, income, age, or financial standing. Common stock is essentially part ownership in the business you are investing in. As the company grows and earns money, the value of your stock rises. On the other hand, if the company does poorly or goes bankrupt, the value of your stock falls. Common stock holders do not participate in the day to day operations of a business, but they do have the power to elect the board of directors.

Along with common stock, there are also different classes of stock. The different classes of stock in one company are often called Class A and Class B. The first class, class A, essentially gives the stock owner more votes per share of stock than the owners of class B stock.

The ability to create different classes of stock in a corporation has existed since 1987. Many investors avoid stock that has more than one class, and stocks that have more than one class are not called common stock.

Google

Google is a good example of using Class A and Class B shares, where the founders and CEO of Google have millions of votes through their Class A shares without any special privilege for dividends. So Google executives can use Class A shares to make the decisions without having to worry about seeking majority approval.

Having Class A and Class B shares is an example of differential voting rights (DVR), where all shares get equal dividend but have different votes to influence the business decisions. Class B shares (with lesser voting rights) are available at a discount to Class A shares, and are very attractive for long term retail investors because they may appreciate more as the discount reduces between Class A and Class B shares during the peak of a positive economy/bull run.

You will also hear about Preferred Stock, which can be thought of as a mix of a stock and a bond. The owner’s of preferred stock can lay claim to the assets of the company in the case of bankruptcy, and preferred stock holders get the proceeds of the profits from a company before the common stock owners.

If you like preferred stock, just be aware that the company typically has the right to buy back the om the stock owner and stop paying dividends. The most recent example if of Goldman Sachs buying back its $5 billion preferred stock issued to Warren Buffet’s Berkshire Hathaway in 2008 in the middle of the global stock market crash after the fall of Lehman Brothers. This is just one of the recent examples. There is no shortage of such examples with preferrred stock because most companies don’t like to have preferred stock outstanding for the long term.

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