In last week’s post I talked about the different types of investments. This week I will start explaining some of those investments, starting with stocks.
A stock is a form of ownership in a company. When a business wants to raise money or capital, it issues stocks. These stocks can come in one of two forms. Common stock, which is the more popular or the type that people think of when they hear “stock.” The other type is preferred stock. Each type has its own unique characteristics, as well as advantages and disadvantages.
This would be the “standard form” of a stock. Holders of common stock have the ability to vote on certain things within the corporation, like electing new people to their board of directors. Common stock holders also have the chance to collect on company dividends, as well as a higher probability the share price will increase.
There are also risks associated with common stock. The dividends some companies pay are not guaranteed and can vary in amount. Also, in the event of the business going bankrupt, holders of common stock are the last to get their investment back. First paid are regular creditors, bond holders, preferred stock holders, and then common stock holders; in that order.
Preferred stocks are more like bonds. They pay a regular dividend in the same amount every time. They also tend to be less volatile because they make regular dividend payments. If the company fails to make a dividend payment, they have to make up for it before they pay any of the common stock holders.
Like common stocks, preferred stocks also have their negatives. As I said, they are similar to bonds, which means if the interest rates move in one direction or the other, the price of the preferred stock will move as well. Preferred stocks also have a callable feature, where the company can call the stocks back at a predetermined price at any time they choose.
Common and preferred stocks have their advantages and disadvantages. The type you choose to invest in will depend on your investment objectives and your risk tolerance. Those looking to take on more risk for the chance that the share price will increase, might choose a common stock, while someone looking for income and maybe more stability, might choose a preferred stock. Each investment carries risk. When making an investment please consider your risk, investment objective and time horizon. Please consult a financial professional before making an investment.