An Overview of Common Stock
Anyone who would like to get involved with trading will need to know how to track insider trading and knowing about common business conduct will be useful. You will need to be informed about the differences involved in common stock and preferred stock. Common stock is a type of corporate equity ownership. It is a security. There are other terms associated with it:
- voting share
- ordinary share
These terms may be used in different parts of the world and they are used frequently. Common stock is the term used in America. Other Commonwealth realms will use the term common stock. The term common stock is referring to:
- a representation of a share of ownership in a company
- divided rights – clarifying who is entitled to receive any remaining assets if liquidation were to occur
- voting rights – this determines who has the power to elect the various board of directors
This is an overview of common stock. It will provide benefits to the issuer, shareholder, and members of society. The other advantages that are associated with Common Stock include:
- equity ownership
- offers a very high rate of return. It offers more than cash and bonds
- allows people to invest in those companies with limited liability (fixed sum)
Defining Preferred Stock
Many entrepreneurs are choosing to start a new business since the pandemic hit the world at a fast and furious pace. It will be important to have a clear understanding of preferred stock. All business conduct is governed by various laws and guidelines that need to be adhered to. Preferred stock may be referred to as:
- preference shares
- preferred shares
- preferreds
This type of stock can have a variety of features associated with it. They will not necessarily be possessed by common stock. This includes the properties of debt instruments and equity. It is typically viewed as a hybrid instrument. The debt instrument is referring to assets. They may require a fixed payment that must go to the holder. Some examples of debt instruments:
- mortgages
- bonds
- can offer dividends
The stocks involved in debt instruments are securities that are considered to be a claim on the earnings. Preferred stocks offer some valid advantages:
- added stability
- fewer risks are involved as compared to common stocks
- the dividends are prioritized
- access to assets
- preferred stock can be converted into common stock
- there is a potential premium that can come from callable shares
Callable shares are an extension of preferred stock. It gives the issuer the right to redeem or call in the stock.
All business ventures require valid information for successful outcomes.
The Biggest Difference: Common Stock vs Preferred Stock
There are some big differences between common stock and preferred stock. The core difference must be known to those trying to get involved with various business dealings. Keep in mind that preferred stock will offer no voting rights to any shareholders. Common stock does offer voting rights to shareholders. Any common stockholder will be at the end of the line in terms of company assets. This means that the following are going to be paid first:
- bondholders
- creditors
- preferred shareholders
Common Stock: Items to Consider
There are some items that ought to be considered in terms of common stock:
- employees and owners can monetize their stakes (ownership)
- a company can use the shares as currency. This can be done in acquisitions and mergers
- there is no sensitivity with interest rates
- there is a lack of voting rights
- there is no growth (divided)
Keep in mind that common stock represents partial ownership within a company. Most people tend to invest in this type of stock. If a company is not doing well, the common stock tends to lose its value. If the company is doing well, the value of the assets tend to increase. The common stock can indeed rise in value and it can decrease and there are no sure guarantees. If a company needs to raise capital, for growth, or for a startup, it will issue common stock. Sometimes it will be a very good long-term investment.
Preferred Stock: Added Considerations
If you are considering buying preferred stocks, you will appreciate added information in order to make an informed decision:
- a person can buy the preferred stock the same way they purchase common stock
- preferred stocks tend to give people more consistent dividends and they usually are higher
- they offer a limited upside potential
