Different Types of Stocks

For beginners in stock market trading, Unifunds find that it is best if they know the different types of stocks in the market in order to choose the best stocks to invest in.

There are two main types of stock:

  • Common Stock

    Most shares of stock are called 'common shares', hence its term. In fact, the majority of stock is issued is in this form.

    The primary reason individuals would buy common stock is because they essentially become part owners of the company they are investing in. Investors get one vote per share to elect the board members, who oversee the decisions made by the management. Generally, the more shares an investor owns, the stronger the vote.

    Over the long term, common stock yields higher returns than almost every other investment by means of capital growth. The higher return comes at a cost, however, since common stocks have the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

  • Preferred Stock

    Preferred stock represents some degree of ownership in a company but, depending on the company, it usually does not come with the same voting rights. The main difference between a preferred stock and common stock is that, with preferred shares, the investors are usually guaranteed a fixed dividend payment.

    The main reason individuals would consider purchasing preferred stock is because the owners of preferred stock are placed higher in the order compared to the common stock owners. Preferred stock owners always receive their dividends before common stock owners, even if a company is going bankrupt. However, at any time and for any reason, the company has the option to buy back the shares of preferred stockholders.

    In general, there are four different types of preferred stock:

    1. Cumulative - These shares give owners the right to accumulate dividend payments that were skipped due to financial problems. If the company later resumes paying the dividends, cumulative shareholders will receive their missed payments first.
    2. Non-Cumulative - These shares do not give their owners payments for skipped dividends.
    3. Participating - These shares may receive higher than normal dividend payments if the company turns a larger than expected profit.
    4. Convertible - These shares may be converted into a specified number of shares of common stock.

    Since preferred shares carry fixed dividend payments, they tend to fluctuate in price far less than common shares. This means that the opportunity for both large capital gains and losses is limited.

    Common and preferred stocks may also fall into one or more of the following categories:

    1. Growth stocks - These stocks have earnings growing at a faster rate than the market’s average. They rarely pay dividends and investors purchase them in hopes of capital appreciation.
    2. Income stocks - Income stocks pay dividends consistently. Investors buy them for the income they are able to generate.
    3. Value stocks - These stocks have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. People buy them with the hope that the market overreacted and that the stock’s price
    4. Blue-chip stocks - Blue-chips are shares in large, well-known companies with a solid history of growth. They generally pay dividends.

    Another way to categorise stocks is by the size of the company, shown in its market capitalisation. There are large-cap, mid-cap, and small-cap stocks. Shares in small companies are sometimes called 'microcap' stocks, and the lowest priced stocks are known as 'penny stocks', which do not pay dividends and are highly speculative.

Different Classes of Stock

While common and preferred are two main forms of stocks, there are also different classes of stock. Stock classes exist almost exclusively with common stock and there are usually two or three different stock classes with each common stock.

Some companies have different classes of common stock that are varied based on how many votes are attached to them. The most common reason for this is the company wanting the voting power to remain with a particular group, therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a selected group, who are given ten votes per share, while a second class would be issued to the majority of investors, who are given only one vote per share.

When there is more than one class of stock, the classes are traditionally designated as:

  • Class A

    Class A stock is primarily the shares of common stock that the individual person can buy, sell or hold. These stocks often represent one vote per share. This means the more shares you own, the stronger your vote. When dealing with the buying and selling of stocks, this stock class is the most commonly traded.

  • Class B

    Class B stock is not traded publicly in the marketplace. These stock shares are often held by company insiders who have worked, or are currently working, for the company. These shares can be sold off, just like Class A stock, but it becomes common knowledge to the public when insiders buy or sell stock. These shares often hold more voting rights than that of Class A stockholders.

  • Class C

    Class C stock is similar to Class A stock in that it is publicly traded, but it does not allow its stockholders to have any voting rights. Because of this, Class C stock can be viewed as lesser in value compared to Class A stock.