A stock is the collective shares of ownership of a company. When a corporation needs to raise money, it can sell units of ownership, or shares, to investors. Public companies that trade in the stock market allow investors to buy and sell their shares. An owner of a company's stock is known as a shareholder. The stock price of a company is determined by its market value divided by the number of its outstanding shares.
Stocks allow shareholders to own equity in their investment of a company and depending on the structure type of the stock, are also granted certain privileges.
Types of Stock
Not all stocks are created equal. Different types of stocks provide different rights for the shareholder. Here are a few of the most common types of stock an investor can own in a corporation:
- Common Stock: As the name implies, this is the most common type of stock a shareholder can own in a company. Investors can buy and sell common shares on the open market and enjoy capital gains and losses based on its value. Depending on the structure of the stock, shareholders receive certain rights like the ability to vote on major decisions and Board of Directors.
- Preferred Stock: This type of stock is different from common shares in that it holds properties that also resembles a bond or debt instrument. Preferred stockholders receive higher dividend payments, preference to proceeds in the event of a liquidation, and the ability to convert into common stock. They usually don't provide voting rights.
- Stock Classes: On occasion, certain companies create different classes of common stock with distinct price values and rights. Usually designated as "Class A" or "Class B" units to provide one set of shareholders with different voting privileges over the other.
While most investors have the ability to purchase common shares of a public company through their online or traditional brokerage, not all brokerage houses have the ability to trade preferred shares. It is important to research thoroughly and understand the type of stock to be purchased before making any investment.