Did You Know 2 Types of Stocks?

Featured Article

When thinking about investing, you probably would’ve generalized categories into bonds, stocks, commodities and what not. But guess what! Almost all of these securities have further sub-categories that differentiate them from each other. These differences are not something you should be afraid of. In fact, they exist according to your very needs and provide the benefits that best attract you!

So for today, lets discuss the two major types of stocks, common stocks and preferred stocks, and see which one of them best fits your desire!

Common Stock

Having Common stocks purchased basically means that you now have an ownership in the business. Although stocks in whole carry that meaning, common stock holders have more control over the management and therefore represent more power. Naturally, they are also the ones that are offered first.

So, for instance, when a company first comes into existence they want to attract specified amount of money into their venture. To do that, companies normally issue common stocks to rich tycoons who invest their money in exchange for ownership. This is also the part where the concept of shareholder begins that you might be familiar with.

But let’s discuss what’s more relevant to you! Should you purchase common stocks of companies if given the opportunity or not? To discuss this, I like to run the common cost benefit analysis. So for that, lets first discuss the advantages and disadvantages of having common stocks.

Giving direction to Company

The first major advantage of having common stocks is that you can decide which direction should the company go. So, for example, if in your opinion the company is engaging into risky operations, you have the ability to put a stop at it. this gives you the power to steer the company is direction that is most beneficial for it. AS the company succeeds, so will you.

Board of Directors

As a person for appetite in investing, you probably would’ve heard a lot about Board of Directors. They are literally the most feared members by companies and companies always try to keep them happy. Guess who they want to keep happy? You!

As a common stock holder, one of the biggest advantage is that members of Board of Directors work tirelessly to safeguard your interest. So, if in any case there is a threat to the common stock holders, Board of Directors immediately come into action to protect your needs. So, it’s a nice thought to have people so feared by organizations only so they can promise you good returns.

No Dividends

Wanting to have a stable lifestyle is human nature. That’s why, a lot of people would want to know exactly how much they are making. However, with common stock, it’s not that easy. You can never tell whether or not a company will give you dividends. Sometimes, that also means no dividends for many business cycles. Unlike bonds or loans, it is entirely up to the CEO to give dividends to stock holders and that can be a serious amount of worry for some.

Last one to be Compensated

We all want to believe that we made the right choice. That the company we invested in is bound to rise. However, that doesn’t mean it definitely will. Sometimes, having a little pessimistic mindset is what pushes people to make the right decision. With common stock however, the sane decision would have been not to purchase it at all.

This is because, in the worst case scenario, if a company files for bankruptcy, common stock holders are the last ones to be compensated after all other parties have been fully compensated. And what if the left amount of money is less than what you invested? Well, quite simply, you incur a loss. In some cases, the loss is s huge that nothing is left for common stock holders and they return home empty.

Higher Returns

However, here it’s also important to mention that due to all these risky situations, common stocks actually provide higher returns. Following the same concept of more risk to more return, common stocks offer much higher dividends then the ones you will get over other securities

Preferred Stock

Preferred stocks are much alike to bonds both in characteristics and benefits. These stocks also show ownership in the company, however, do not have the power that common stock holders wield.

Here are some advantages of Preferred stock:

Fixed Dividends

The first and foremost advantage of preferred stock over common stock is that preferred stock holders receive fixed dividends. This is quite beneficial to investors such as me and you who will rather have safety than our money being used by different parties. Hence, fixed amount of dividends are a good motivation for low risk investors.

Compensated along with bond holders and lenders

Earlier, we discussed how common stock holders are in big trouble if a company files for bankruptcy. However, in case of preferred stock, they are treated as simply loans. Therefore, they are compensated along with other types of lenders. Hence, by investing in preferred stock you will have prepared yourself for the worst case scenario.

But preferred stocks too come with certain disadvantages as well, such as:

Lower Returns

Although, preferred stock is a lot less risky than common stock, it also has a lower return. Therefore, the first downside to having preferred stock is that you make less money out of it.

So, consequently, if you have preferred stock, chances are that you will make money, but extremely slowly. Therefore, if you want to earn from stocks quickly, then preferred stock will probably not be your first choice.

No control over Direction

The second problem to Preferred stock is the lack of control it offers. Unlike common stock, preferred stock holders have no voting power whatsoever. Therefore, you are unable to direct the company in any direction.

Therefore, if the company is making a mistake in your opinion, the most you can do is sell your shares. Otherwise, you will not have the power to do anything about it.

So now we know some basic level of cost and benefit analysis of these types of stocks. It is now up to you, to choose which type of stock is your winning choice.