A corporation’s stockholder or shareholders (sometimes thousands of people) all have equity in a company or own a fractional portion of the whole. People buy stock because they expect to profit when the company profits. Companies issue two kinds of stock, common and preferred.
Common stocks are ownership shares in a corporation. They are sold initially by the corporation and then traded among investors. Investors who buy them expect to earn dividends as part of their profits and hope that the price will go up on their investment so it will be worth more. Common stocks offer no performance guarantees, but historically have produced a better return than that of other investments over the long term. Some of the risks that investors take when they buy stocks are that the individual company will not do well, stock prices will weaken or at worst it is possible to lose an entire investment. The shareholders of a corporation are not responsible for corporate debts. When corporations sell shares, they give up some control to investors whose primary concern is profits and dividends. In return, they get investment money they need to build or expand their business.
Preferred Stocks are also shares issued by a corporation and traded by investors. They differ from common stock in several ways. Preferred stock reduces risk, which limits your reward. Dividends to preferred stocks are paid before dividends on common stock. But the dividend is not increased if the company profits, and the price of the preferred stock increases more slowly. Preferred stockholders have a greater chance of getting some of their investment back if a company fails.
Classes of Stock
Corporations may also issue different classes of stock. An example would be Sears’ Preferred P shares (they represent ownership in a specific subsidiary). Others labeled A, B, C, or some other letter have a specific investment purpose, sell at different market prices, or have different dividend policies. There might be restrictions on ownership as well.
When the price of a stock gets too high, investors are reluctant to buy because they think it has reached its peak or costs too much. Corporations have the option of splitting the stock to stimulate trading. When a stock splits, there are more shares available, but the total market value is the same. The initial effect of a stock split is no different from getting change for a dollar. The only difference is there are more shares available to new buyers at a more accessible price.