Stock Market Basics - Common Stock vs Preferred Stock

Types of stock – common vs. preferred

The type of stock most commonly that you will see in the market is the normal stock or which is known as common stock. In fact most of the companies issue that stock only.

You would wonder why the common stock is different than the other stock known as preferred stock and why the companies issue them. As a stock market basics student you should know the difference if you want to buy the correct type of stock and earn money.

What is different is the way the voting rights are issued to people and also that drives how the preferred stocks have less risk than the others. Let us say the company wants to have the voting rights restricted to a certain set of people but also wants the general public to invest in stock but does not want to give them much voting power.

Now this voting power is generally needed to get resolutions and agreements done at the Annual general body meeting or the extraordinary general body meeting. Suppose hypothetically if the entire general public ganged up against the company then you can always have the resolutions blocked and the may be have some things be approved with the people managing the company having no say in the decisions.

To avoid these kinds of situations it is required sometimes by the company to offer preference shares to certain investors who are more than likely to side by the management. These preference shares usually will carry more voting power than the general class of shares. For example preferred shares will have ten voting rights per share as opposed to common shares which will have only one vote per share.

The preference shares have a fixed dividend and they are assumed to be like a hybrid between shares and bonds. Also in the event of liquidation these stock are known to be very much like the common stock apart from the fact they will come in first to get any assets upon liquidation and then will come the common stock holders.

Classes of Stock

Several companies also offer different classes of stock which may be helpful for the voting rights differentiation as well. If you are reading a stock market ticker you would notice the class right next to the stock symbol e.g share XYZ will be marked as XYZa and XYZb or XYZ.a and XYZ.b

Hope you enjoyed this stock market basics lesson about classes of shares.