When it comes to investing, stocks are one of the most popular options. But what exactly are stocks? Investment professionals usually refer to common stock when talking about stocks. Common stock is the most basic type of share that publicly traded companies issue. When you own common stock, you have the right to vote on board members and other corporate matters at a company's annual meeting.
Generally, one share equals one vote. An investor who owns five shares in the ABC Company, for example, would have only five votes. Common stock also offers the potential for price appreciation if the company performs well. Some common stocks also pay regular dividends, but payments are never guaranteed. A disadvantage of common stock is that its shareholders are the last in line to be reimbursed if the company goes bankrupt. In addition to common stock, some companies issue preferred shares.
Preferred shares offer some of the advantages of both common stocks and bonds in a single security. Preferred shares pay their holders guaranteed dividends, in addition to the possibility of price appreciation, as is the case with common shares. Preferred shareholders are also more likely to receive some form of compensation if the company becomes insolvent. Another difference is that the issuing company can choose to buy back preferred shares of its choice. It is also possible for shareholders to convert their preferred shares into common shares.
However, the biggest disadvantage of preferred shares is that preferred shareholders do not have the right to vote. Some companies choose to issue multiple classes of shares, such as class A and class B shares. The most common reason a company issues different classes of shares is to give key investors greater control over the company's affairs. Large cap stocks are companies with a market capitalization of more than $10 billion. A disadvantage of large cap stocks is that companies of this size grow much more slowly than newer and smaller companies.
That means investors shouldn't expect excessive returns when investing in large cap stocks. Mid-cap stocks may offer the potential for growth as they expand their share in the markets in which they operate. In addition, they are often the target of mergers or acquisitions by large capitalization companies. Small-cap stocks offer investors tremendous growth opportunities, and the small-cap market is made up of many future mid-cap and large cap companies. At the same time, these stocks are among the riskiest investment options, as small-cap stocks experience greater market volatility. Growing stocks are companies that are expanding their revenues, profits, stock prices, or cash flows at a faster rate than the overall market. The goal when investing in growing stocks is to see strong price appreciation over time.
However, growing stocks offer greater potential for volatility, as these companies are more likely to take risks to achieve that growth. Growing companies tend to reinvest their profits in the business and may not pay dividends. While many growing stocks are smaller companies that are new to the market, that's not always true in all cases. Value stocks are strong companies that are being undervalued by the stock market. Securities investors try to discover companies in the value-added stock category, buy their shares and wait for the rest of the market to realize their true value. Common stocks are probably what you think of when you're looking to invest in stocks. Common stock grants you a stake in the company with the ability to vote on key issues, such as the election of the board of directors or the adoption of certain company policies.
When people hear the word stocks, they often think of elaborate graphics and flashing prices that move throughout the day. But when you buy a stock, you buy a stake in a real business and your long-term profits will depend on the profits and overall success of that company. Earnings growth will contribute to raising the stock price for common stock owners and will allow the company to share those profits with shareholders in the form of dividends. Preferred shares are more like a bond than a stock. Usually, you won't have any voting rights, but you'll receive dividend payments before common shareholders. Preferred shares are issued at nominal value and shares are amortized at maturity, so you don't have the opportunity for price appreciation that occurs with common stock. Your return will come mainly from the dividends you receive.
Preferred shares can be redeemed before maturity, and some preferred shares are convertible into a certain amount of common stock. In conclusion, there are two main types of shares: common shares and preferred shares. Common stock grants you a stake in a company with voting rights while preferred shares offer guaranteed dividends but no voting rights. Large cap stocks offer slower growth while mid-cap and small-cap stocks offer greater potential for growth but also greater risk. Growing stocks offer potential for price appreciation but may not pay dividends while value stocks offer strong companies at undervalued prices.