Types of Stock
A stock market, equity market or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses.
There are various types of stocks: –
Common Stock: – Common stock is, well, common. When people talk about stocks in general they are most likely referring to this type. In fact, the majority of stock issued is in this form. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid.
Preferred Stock: – Preferred stock represents some degree of ownership in a company but usually doesn’t come with the same voting rights. This may vary depending on the company. With preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder but still after debt holders. Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason. Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares. (If you don’t understand bonds make sure also to check out our bond tutorial.)
Hybrid stocks: – Some companies also issue hybrid stocks. These are often preferred shares that come with an option to be converted into a fixed number of common stocks at a specified time. These kinds of stocks are called ‘convertible preferred shares’. Since these are hybrid stocks, they may or may not have voting rights like common stocks. Hybrid securities are bought and sold on an exchange or through a brokerage. Hybrids may give investors a fixed or floating rate of return and may pay returns as interest or as dividends. Some hybrids return their face value to the holder when they mature and some have tax advantages
Stocks with embedded-derivative options: – Some stocks come with an embedded derivative option. This means it could be ‘callable’ or ‘putable’. A ‘callable’ stock is one which has the option to be bought back by the company at a certain price or time. A ‘putable’ share gives the stockholder the option to sell it to the company at a prescribed time or price. These kinds of stocks are not commonly available. Embedded derivatives are used in many types of contracts. The most frequent use of the embedded derivative has been seen in leases and insurance contracts. It has also been seen that preferred stocks and convertible bonds also host embedded derivatives.
Stocks on the basis of market capitalization: – Stocks are also classified on the basis of the market value of the total shareholding of a company. This is calculated using market capitalization, where you multiply the share price by the total number of issued shares. There are three kinds of stocks on the basis of market capitalization: – Small-cap stocks, Mid-cap stocks, Large-cap stocks.