Trading Strategies and Types of Stocks
Stocks are issued in two main types: common stock and preferred stock. Some companies go one step further and issue classified shares separated into several classes. Each type of stock has unique benefits and drawbacks.
Common stock vs. Preferred stock
|COMMON STOCK||PREFERRED STOCK|
|Lower priority for dividends||Nearly assured dividends|
|Dividend payments can vary||Dividend payments are usually fixed|
|Usually has voting rights||Usually without voting rights|
|Lowest priority in case of bankruptcy||Better priority than common stock in case of bankruptcy (but usually lower priority than bond holders)|
|Only sold at owner’s discretion||Can be callable by issuer|
stock lives up to its name by being the most commonly traded type of stock in the market. Stockholders are entitled to a share of profits, either through variable dividends or by appreciation in the stock price. Neither is guaranteed. They also get one vote per share during annual shareholder meetings.
As an investment type, common stock has excellent potential for capital appreciation. In fact, common stocks have historically outperformed almost all other forms of investment over the long term. Please note: high performance comes with considerable risk. If a company goes bankrupt, common stockholders will be the last to obtain remaining assets. They may receive nothing at all.
stockholders receive a nearly assured fixed dividend for as long as they own their shares. Common stockholders receive their dividends after preferred stock dividends are paid. In the event of bankruptcy, preferred stockholders have higher priority than common stockholders in receiving cash from liquidation. (However, they still rank below creditors and bondholders.)
The downside of preferred stock is that the shareholders usually don’t have any voting rights. Also, preferred stock may be “callable”, meaning the company has the right (with restrictions) to repurchase the shares.
stocks refer to different classes of stocks (usually A and B) issued by the same company. Each class has different privileges such as the number of votes per share or size of dividend payments.
The stock markets
When buying and selling stocks, you’ll likely deal with the traditional New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). The latter is the most prominent example of a virtual market, as it is not located in a physical space such as Wall Street. In this secondary market, you’ll come together with other traders to do business. Although the term “stock exchange” is used, securities such as options or bonds are also traded in the market.