Basics

Common and preferred shares

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Common actions

Common actions are, worth the redundancy, common. When people talk about stocks, they are generally referring to this type. In fact, most shares are issued this way. In the last section we talked about the characteristics of stocks. These represent ownership of a business and a claim (dividends) for a portion of the profits. Investors get one vote per share to elect the board members, who oversee the main decisions made by management. In the long run, common stocks, through capital growth, produce higher returns than almost all other investments. This higher return comes at a cost, as common stocks carry the most risk. If a company goes bankrupt and liquidates, common shareholders will not receive the money until it is paid to creditors, bondholders and preferred shareholders.

Preferred stock

Preferred shares represent a certain degree of ownership of a company, but generally do not have the same voting rights, although this can vary depending on the company. Investors are generally guaranteed a fixed dividend forever with preferred shares. This is different from common stocks, which have variable dividends that are not guaranteed. Another advantage is that, in the case of liquidation, the preferred shareholders are paid earlier than the common shareholder (but after the debt holders). Preferred shares can also be demanded, which means that the company has the option to buy the shares at any time and for any reason (usually for a premium). Some people consider preferred stocks to be more of a type of debt than equity. A good way to think of these types of stocks is to think of them as something in between bonds and common stocks.

Different types of shares

Common and preferred shares are the two main forms of shares. However, it is also possible for companies to customize different classes of shares. The most common reason for this is that the company wants the voting power to stay with a certain group. Therefore, the different classes of shares have different voting rights. For example, one class of shares might be held by a select group that is 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 shares, the classes are traditionally referred to as Class A and Class B. Berkshire Hathaway (BRK) has two types of shares. The different shapes are represented by placing the letter behind the ticker: “BRKa, BRKb” or “BRK.A, BRK.B”.

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