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Understanding Stocks
This week in Traders Corner, we are going to be taking a close look at stocks. Now most of us have a pretty good understanding of what stock is, but many people don’t realize that there are different types of stocks; each with their own set of unique characteristics.
First the basics…..What is stock? Simply put, stock is a piece of a company. Stock is measured in shares, so the more shares of stock you own, the more of the company you own. Now as I mentioned before, there are different types of stock. When you ask the average investor about stock, more often that not, you’ll unconsciously be discussing what is called common stock. When you make stock trades through your broker, you are likely engaging in a trade of common stock. Common stock is pretty straightforward as the ratio is 1-1; this means one share of stock equals the voting rights of one share of stock. Easy enough…but what happens when the ratio goes to 1-5 or 1-100? When this happens, we move into another type of common stock called Class Stock
There are a few types of common stock. The first of these types are called Class A stocks. Class A stocks are shares that hold more voting rights that standard common stock. One share of class A stock is usually associated with five or more voting rights. So basically, one share of Class A stock equals five shares of standard common stock. There are several classes of stock. The range can go anywhere from Class A to Class Z. The weight of each class of stock is usually determined by the company’s bylaws. In some cases, companies will disguise the disadvantages of owning Class A stock by placing more voting rights with Class B stocks…again, this is determined by the company itself.
Another type of stock are called Preferred. Preferred stock is a stock type that allows an investor to collect a stock dividend that must be paid before all other common stock holders receive their dividends. Typically, Preferred stock holders do not having any voting rights when it comes to making shareholder decisions. Preferred stock is a double edged sword, while they do forego voting rights, they are entitled to collect earnings and assets in the event the company goes under or liquidates large amounts of assets. There are all types of Preferred stock. Terms like Convertible Preferred Stock and Prior Preferred Stock are other classes of Preferred Stock that usually have even more advantages associated with them. We won’t go into these types specifically as they are beyond the scope of this discussion.
The final stock type that we’ll discuss is Warrants. Warrants are somewhat different than class stocks or preferred stocks, because they are issued through the company itself, not through an exchange body such as NYSE or NASDAQ. A Warrant is basically a derivative, much like options. Warrants are issued by the company to give investors the option to purchase shares at a specific price and within a specific period of time. If this sounds familiar, it should. The only difference between call options and Warrants is the fact that Warrants are issued by the company to attract new investors and venture capitalists. Warrants usually have a lifespan that is measured in years while options usually only have life spans of a few months.
This week in Traders Corner, we are going to be taking a close look at stocks. Now most of us have a pretty good understanding of what stock is, but many people don’t realize that there are different types of stocks; each with their own set of unique characteristics.
First the basics…..What is stock? Simply put, stock is a piece of a company. Stock is measured in shares, so the more shares of stock you own, the more of the company you own. Now as I mentioned before, there are different types of stock. When you ask the average investor about stock, more often that not, you’ll unconsciously be discussing what is called common stock. When you make stock trades through your broker, you are likely engaging in a trade of common stock. Common stock is pretty straightforward as the ratio is 1-1; this means one share of stock equals the voting rights of one share of stock. Easy enough…but what happens when the ratio goes to 1-5 or 1-100? When this happens, we move into another type of common stock called Class Stock
There are a few types of common stock. The first of these types are called Class A stocks. Class A stocks are shares that hold more voting rights that standard common stock. One share of class A stock is usually associated with five or more voting rights. So basically, one share of Class A stock equals five shares of standard common stock. There are several classes of stock. The range can go anywhere from Class A to Class Z. The weight of each class of stock is usually determined by the company’s bylaws. In some cases, companies will disguise the disadvantages of owning Class A stock by placing more voting rights with Class B stocks…again, this is determined by the company itself.
Another type of stock are called Preferred. Preferred stock is a stock type that allows an investor to collect a stock dividend that must be paid before all other common stock holders receive their dividends. Typically, Preferred stock holders do not having any voting rights when it comes to making shareholder decisions. Preferred stock is a double edged sword, while they do forego voting rights, they are entitled to collect earnings and assets in the event the company goes under or liquidates large amounts of assets. There are all types of Preferred stock. Terms like Convertible Preferred Stock and Prior Preferred Stock are other classes of Preferred Stock that usually have even more advantages associated with them. We won’t go into these types specifically as they are beyond the scope of this discussion.
The final stock type that we’ll discuss is Warrants. Warrants are somewhat different than class stocks or preferred stocks, because they are issued through the company itself, not through an exchange body such as NYSE or NASDAQ. A Warrant is basically a derivative, much like options. Warrants are issued by the company to give investors the option to purchase shares at a specific price and within a specific period of time. If this sounds familiar, it should. The only difference between call options and Warrants is the fact that Warrants are issued by the company to attract new investors and venture capitalists. Warrants usually have a lifespan that is measured in years while options usually only have life spans of a few months.