Friday, June 19, 2009

Stock Trading Basics - What Are the Different Types of Stocks?

Most first time stock traders will be confused by the different types of stocks in the stock market. This confusion will cause most first time stock traders to buy the wrong stocks or turn away from the stock market altogether. Knowing what types of stocks are available in the stock market and what the individual types of stocks means is important if you want to succeed in stock trading

Most often, you will come across the term "Common Stock". Common stock can be purchased by anyone, regardless of income, age, or financial background. Common stock is an important part-ownership of the company that you are investing in. The value of your stock will rise as the company grows and earns money. Alternatively, the value of your stock will fall when the company goes bankrupt or does poorly. Common stock holders have the power to elect the board of directors but they are not involved in the daily operations of the business.

Apart from the common stock, another type of stocks is the stocks that are divided into different classes. In one company, the different classes of stock are often called Class A and Class B. The stock owner of the first stock class, class A will be awarded more votes per share of stock than class B stock owners. This ability of creating stocks of different classes in a company was created in 1987. Stocks with different classes are not called common stocks and most investors will avoid these types of stocks.

The Preferred Stock is the most appealing type of stock than the other stocks. Preferred stock is not actually a stock because it is a mix of a bond and a stock. If the company goes bankrupt, preferred stock holders can lay claim to the assets of the company and the proceeds of the profits from a company goes to the Preferred stock owners followed by the Common stock owners. Most of us would prefer the preferred stock of a company but be aware that the company has the right to buy the stock back from the stock owner and can stop paying dividends altogether

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