Types of Stocks

May 29, 2013 6:27 am

Stock exchange There are numerous types of stocks in which you can invest based on your interests, amount of money you have available to invest, your appetite for risk, and your investment goals.

Common Stocks

– Not surprisingly, common stocks are the most common type of stocks bought and sold by investors. Quite simply, common stocks are shares of a company that provide the buyer with certain rights which often include voting on the company’s affairs (such as who should be part of the Board of Directors as well as whether or not a company should accept an acquisition offer). Some common stocks also pay a dividend which reward investors for buying and holding the stock.

Preferred Stocks

– When you mix stocks and bonds together, you get a preferred stock. Similar to a common stock, the value of a preferred stock rises and falls in value. However, preferred stocks also act like bonds in that they pay a fixed amount to the share holder in the form of a dividend.
While common stocks and preferred stocks are the two most common types, stocks can also be classified according to the type of company that issues them.

Market Capitalization

– Sometimes stocks are categorized based on their market capitalization,the total value of all the shares of a company. So, if a company has 1 Million shares which trade at a value of $10, the market capitalization of that company would equal 10 Million. A rule of thumb for companies that are categorized by their market cap would be:
– Mega-cap: Over $200 Billion
– Large-cap: Over $10 Billion
– Mid-cap: $2 Billion to $10 Billion
– Small-cap: $250 Million to $2 Billion
– Micro-cap: Below $250 Million
– Nano-cap: Below $50 Million

Class A, B Shares

– Class A Shares are simply a special classification giving the shareholders extra or different voting rights. For example, Class A shareholders may have 10 votes for every share they own, not simply the one per share of a Class B shareholder. Generally speaking, most investors will only be able to purchase one class of share.

By Sector

– Quite often, you’ll see stocks classified by their sector. Most commonly, you’ll hear of 10 sectors such as energy, health care, finance, etc.

Stock Derivatives

– Stock derivatives are types of investments that “derive” their value from underlying assets such as a stock. the most popular are stock options, which provide you with the option to buy or sell a stock at a certain price before an agreed-upon date. So, if you believe a stock is going to go up in value, you may buy a call option at today’s price, promising the seller of that option that you’ll buy it by a predetermined date for a predetermined price. Options trading is considered very risky by many.

When no one is buying a stock because of a high price, companies will often issue a stock split. When they issue a stock split, a company gives you more stock for your money. They simply distribute more stocks, and decrease the price for a stock. This just allows someone who doesn’t have as much money to invest in a company. If you own stock in a company that splits two for one, you would get twice the amount of stocks that you had before, but each stock will have decreased in value by fifty percent. Stocks can split into any number, but they can also reverse split which means that the stocks double in value, but you only get to keep half the stocks you had before. In either split, you do not lose any money. It is just like trading in two five dollar bills for one ten dollar bill, or vice versa.

Taking a Closer Look at Common Stock

Here are some important things to understand about common stock shares:
Each stock share is equal to every other stock share in its class. This way, ownership rights are standardized, and the main difference between two stockholders is how many shares each owns.
The only time a business must return stockholders’ capital to them is when the majority of stockholders vote to liquidate the business (in part or in total). Other than this, the business’s managers don’t have to worry about losing the stockholders’ capital.

A stockholder can sell his or her shares at any time, without the approval of the other stockholders. However, the stockholders of a privately owned business may agree to certain restrictions on this right when they first became stockholders in the business.

Stockholders can put themselves in key management positions, or they may delegate the task of selecting top managers and officers to the board of directors, small group of persons selected by stockholders to set the business’s policies and represent stockholders’ interests.

The all-stocks-are-created-equal aspect of corporations is a practical and simple way to divide ownership, but its inflexibility can be a hurdle, too. Suppose the stockholders want to delegate to one individual extraordinary power, or to give one person a share of profit out of proportion to his or her stock ownership. The business can make special compensation arrangements for key executives and ask a lawyer for advice on the best way to implement the stockholders’ intentions.
Nevertheless, state corporation laws require that certain voting matters be settled by a majority vote of stockholders. If enough stockholders oppose a certain arrangement, the other stockholders may have to buy them out to gain a controlling interest in the business. The limited liability company legal structure permits more flexibility in these matters.

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