Basic Stock Investing 2: Different types of stocks

You may be surprised to hear that there is more than one type of stock that a company might issue.

Common Stock

Common stocks are the most common (naturally) type of stock investment. A common stock is a stock that gives it's owner certain voting rights in the company. Common stocks still have a claim to the company's assets and earnings as described in my last post, but the most common way to make money off of common stocks is to buy the stock at a lower price and sell it to someone else at a higher price. Common stocks have the highest average annual return out of all types of investments, but they also have the highest risk. Because common stock holders have less of a claim to the company's assets than bondholders and preferred stock holders if a company goes into bankruptcy common stock holders will often receive little or no money.

Preferred Stock

Preferred stocks are similar to common stocks but most of the time don't carry any voting rights. One advantage that preferred shares have over common shares is that preferred shares have a guaranteed fixed dividend as opposed to common stock dividends which are not guaranteed and are subject to change. Preferred shares also have a stronger claim to the companies assets than common share holders. If the company decides to liquidate then it's preferred shareholders are more likely to get paid than common stock holders.