Investing Basics – Types of Stocks and Their Benefits
Stock is the whole shares of ownership in a company divided into many shares. In American English, however, the stocks are collectively referred to as “common stock”. Each share of this stock represents a fractional ownership in proportion to its number of shares throughout the entire value of the company. One type of stock is preferred stock. It is like a bond that gives the shareholder voting rights and limited liability.
Any corporation may issue common stock. It is the most common type of stock and is issued by all kinds of corporations. The issuing company can issue unlimited amounts and can issue them in different denominations. There is also perpetual stock, which has the same rights as common stock but is not convertible. This type of stock has limited liability and is not entitled to dividends.
Another kind of stock is “call” or “put” option. These give the stockholder the right to purchase or sell a specific amount of underlying stock at a specific price within a set period of time. A stockholder can exercise this right by selling the underlying stock at the strike price. The exercise of such stock options gives the stockholder the right to convert the Options contract into a cash value.
Other popularly-owned stocks are “bonds”. Bonds are securities which are secured by a combination of land or buildings (usually) that have been owned by the issuing company for a specified period of time. Usually, such bonds are purchased from banks and are therefore part of an investment portfolio.
In some companies, ownership is sold in multiple-parties. This means that two or more shareholders will own a part of the company. This type of ownership is usually called a partnership. When a partnership is made, all the partners are treated as owners of that partnership and all their stocks are jointly held and hence, all dividends paid on such stocks are shared among all the partners in the same way that the dividends are shared among the shareholders of an investment portfolio.
Lastly, when purchasing shares, investors may choose common stocks, preferred stocks and preferred shares. Common stocks are those which are traded publicly; preferred stocks are those which are owned by a company but which are not traded publicly and preferred shares are those that can be owned by a limited company and which are issued from treasury stocks, which are company-issued securities. The advantages of purchasing common shares and preferred stocks are that they offer the investors a way to own a large part of a business without having to buy individual shares, which limits their risks, and they offer the investors voting rights.
