Stocks: Different kinds of
Stocks
Common Stock - When people talk about stocks in general they are
most likely referring to this type of stock. In fact, the majority of stock issued is in
this form.
Common shares represent ownership in a company and ties the investor's fortunes
to the company. The price of the stock goes up and down, depending on how the
company performs and how invests think the company will perform in the future.
Some stocks pay dividends, which usually come from profits. If profits fall,
there is a chance that dividend payments may be reduced or eliminated
altogether. Investors get one vote per share to elect the board members,
who oversee the major decisions made by management.
Common stock yields higher
returns than almost every other investment over the long-term horizon. This higher return comes at a cost
since common stocks entail the most risk. If a company goes bankrupt and
liquidates, the common shareholders will not receive money until the creditors,
bondholders, and preferred shareholders are paid.
Preferred Stock - Many companies also this type of stock which represents some degree of ownership in a company but usually
doesn't come with the same voting rights. With preferred shares investors are usually guaranteed a fixed
dividend forever. For this reason, preferred stock is more like a bond than a
stock. This is different than common stock, which has variable
dividends that are never guaranteed. Another advantage is that in the event of
liquidation preferred shareholders are paid off before the common shareholder
(but still after debt holders). Preferred stock may also be callable, meaning
that the company has the option to purchase the shares from shareholders at
anytime for any reason (usually for a premium). Theoretically, the price of
preferred stock can rise or fall along with the common stock. In reality it
doesn't move nearly as much. A good
way to think of these kinds of shares is to see them as being in between bonds
and common shares. (If you don't understand bonds make sure also to check out our section on
bonds.)
Different Classes of Stock:
Common and preferred are the two
main forms of stock; however, it's also possible for companies to customize
different classes of stock in any way they want. The most common reason for this
is the company wanting the voting power to remain with a certain group; hence,
different classes of shares are given different voting rights. For example, one
class of shares would be held by a select group who are given ten votes per
share while a second class would be issued to the majority of investors who are
given one vote per share.
When there is more than one class of stock, the classes are traditionally
designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), the company
of Warren Buffett , has two classes of stock. The different forms are
represented by placing the letter behind the ticker symbol in a form like this: BRKa, BRKb
or BRK.A, BRK.B. Warren Buffett
is known as "the Oracle of Omaha", he is the Chairman of Berkshire Hathaway, and
arguably the greatest investor of all time. His wealth fluctuates with the
performance of the market, but for the last few years he has been reported to be
worth over $30 Billion, making him the 2nd richest man in the world behind Bill
Gates of Microsoft. Buffet is a value investor. His company Berkshire Hathaway
is basically a holding company for his investments containing public companies
Coca-Cola, American Express, Gillette, etc. and other privately owned companies
such as Geico.
Size matters: Small, mid or large cap Stocks
stocks are further broken down based on the size of the company (market
capitalization). Market capitalization, or cap, is one of the criteria investors
use to choose stocks, which are often categorized as small-cap, mid-cap, and
large-cap. Generally, large-cap stocks are considered the least volatile, and
small-caps the most volatile. The term market capitalization is sometimes used
interchangeably with market value. It is calculated by multiplying the number of
existing shares, or shares the company has issued, by the current price per
share. For example, a company with 100 million shares of stock with a current
market value of $30 a share would have a market capitalization of $3 billion.
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Small-capitalization (small-cap)
stock - Shares of relatively small publicly traded corporations, with a
total market value, or capitalization, of less than $1 billion, are typically
considered small-capitalization, or small-cap, stocks. Small-cap stocks, which
are tracked by the Russell 2000 Index, tend to be volatile in the short term,
since they are issued by young, potentially fast-growing companies whose
successes can't be guaranteed. Over the long term — though not in every period —
small-cap stocks as a group have produced stronger returns than any other
investment category. Mutual funds that invest in this type of stock are known as
small-cap funds.
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Mid-capitalization (mid-cap) stock - A mid-cap stock is issued by a
corporation whose market capitalization is between $1 billion and $5 billion,
making it smaller than the large-caps tracked by Standard & Poor's 500-stock
Index (S&P 500) but larger than small-caps. Investors buy mid-cap stocks for
their growth potential and their prices, which are typically lower than for
large-caps. At the same time, these companies tend to be less volatile than
small-caps, in part because they have more resources with which to weather an
economic downturn. Mutual funds that invest in this type of stock are known as
mid-cap funds.
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Large-capitalization (large-cap) stock - The stocks of companies with
market capitalizations of $5 billion or more are known as large-cap stocks.
Market capitalization is figured by multiplying the number of existing shares by
the current share price. Mutual funds that invest in this type of stock are
known as large-cap funds.Large-cap stocks, which are tracked by Standard &
Poor's 500-stock Index (S&P 500), are generally considered less volatile than
stocks in smaller companies, in part because they have larger reserves to carry
them through economic downturns. However, market capitalization is always in
flux. Today's large-cap stock can become a small-cap stock if the share price
plunges either in a general market downturn or as a result of internal problems.
And the opposite is true as well, as the fairly recent growth of many of the
country's largest companies demonstrates.
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You'll probably heard it
before, the market is up, the market is down... Everyday we hear
about the stock market on the news, radio, and in the paper. What
does it mean when they say: "The market turned in a great
performance today"? What is "The Market" anyway?
When people are talking
about "The Market" they are actually referring to an index such as
Dow Jones Industrial Average (DJIA), S&P 500, and the Nasdaq
composite. The Dow Jones Industrial Average (DJIA) contains 30 of
the largest and most influential companies in the United States.
It is hands down the most recognized index in the world to
represent how the stock market as a whole is doing. |
Next-->>
Different categories of stocks
It is an unfortunate human failing
that
a full pocketbook often groans
more loudly than an empty stomach.
-- Franklin Delano Roosevelt --
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