Different Types of Stocks

When a corporation needs more money for business, they issue shares. There are mainly 2 types of stocks – Common Stocks & Preferred Stocks.

Types of stocks
Types of stocks

People generally refer to Common Stocks when they refer to stocks. Most of the stocks are issued in the form of common stocks. A common stock grants a person the right to vote in Corporation and dividend claim. If a company goes bankrupts and liquidates, common stockholders are the last ones to get paid.

Same as bonds, preferred stocks does not come with voting rights. Preferred stocks are stocks which guarantee fixed dividend to the stockholders in perpetuity. The advantage of having a preferred stock is that the stockholder will get paid before common stockholders in case the company goes bankrupt and liquidates.

Apart from these two types, the stocks can be classified into different classes of stocks. The reason of dividing stocks into different classes is to keep the voting rights limited to certain groups. These classes of stocks are structured with different voting rights and make the company difficult to takeover.

For example: There are 2 classes of stocks in a company, say Class A & Class B. Usually Class A refers to the owners of companies who has privately owned the company. Class B shares structure with different voting rights to maintain control of the company.

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Stock Market Concepts & Basics

Let us start with the fact that shareholders only own the shares of the corporation, they do not own the corporation. To understand the fact present above, understand that law treats corporations as legal persons i.e. corporation can own assets, can borrow, file taxes etc. The chairs and tables at corporate office belong to the corporation, and not to the shareholders. It is clear that if a corporation goes bankrupt, only property of corporation are at risk, not shareholder’s personal property. Also if a shareholder goes bankrupt, she/he cannot sell corporate property to pay off debts.

stock market concepts and basics
Stock market concepts and basics

Shareholders own the shares of the company and company owns the assets. So it is very incorrect to say that you own one third of a company if you own 33% shares of the company. Instead you can say that you own 100% of one third of company’s shares. Owning shares gives you the right to vote in shareholder meetings, earn profits etc.

As discussed in previous blog, the initial shareholders, when the company was founded, are cofounders and early investors. For example, if there are 3 early investors in the company, then they own one third of the company’s shares. Now as the business grows they may contact other investors to expand their capital. Till this moment the company is private. Working with private investment is not possible after a time period (for company’s growth). Therefore company may consider an Initial Public Offering or IPO. Considering an IPO transforms a company from Private to Public.

Before discussing the types of Stocks, let us discuss what the meaning of dividend is.

Dividend

A dividend is a portion of company’s earning which is paid to company’s shareholders. It is managed by company’s board of directors. They are paid as cash payments, as shares of stock, or other property. The most common mode among them is Cash Dividends. Dividend originates from company’s net profit & the maximum part of which is kept by company for further development while rest is paid to the shareholders.

In the next blog, we will discuss what the basic types of Stocks are. If you want to know more about stocks or wish to trade in the share market, get in touch with ProfitAim Research, a SEBI Registered investment advisory company. We offer stock market tips in Cash segment, Option segment, Future segment, Nifty Bank segment and much more. For more details, visit https://profitmresearch.com/ . You can also give us a call at 7049501000 for FREE TRIAL service!