A stock, in some cases also known as equity, is a type of financial instrument that is able to reflect ownership of a portion of a company.
Stockholders are entitled to a share of the corporation’s assets and profits and those depend on the amount of shares they have, meaning the more shares you possess, the more of the corporation’s assets and profits you own. “Shares” are the units used to measure stock.
So How Do Stocks Actually Work?
The stock is first sold by the corporations in order to raise capital to operate their businesses. The buyer, now recognized as a stockholder, has now purchased a piece of the company and may be entitled to a portion of the corporation’s assets and profits, which all depend on the type of shares acquired.
In simpler words, the stockholder now owns a piece of the company.
Now that we have that out of the way;
Are There Really Different Types of Stocks?
The answer is yes. In fact, there are two types of stocks; common and preferred stock.
If you’re new to the investing scene, a wise place to start would be to invest in this type. Owning common stock in a company would give you the right to vote as well as a share of the company’s profit.
Common stockholders are also able to receive dividends, which are payments that are provided to stockholders on a regular basis. However, these dividends are often variable and not guaranteed.
This is also suitable for investors that are looking for long-term growth.
Another type available for investors is the preferred stock where those who invest in this type of stock have a larger claim on assets and earnings than common stockholders, but the one setback in this stock is that stockholders do not have voting rights.
Preferred shareholders also receive special treatment from the invested company where dividends are given to preferred shareholders first, even in the event of bankruptcy or liquidation.
Now that we have covered the basis of understanding stock, take time to fully dive deeper into this topic and start to become an investor yourself. Whether you become a common stockholder or a preferred stockholder, it is entirely up to you!