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WIKI ANALYSIS
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This article is a part of Wikinvest's Personal Finance section and Guide to Investing. Please contribute or edit to improve it. |
A stock is a security that represents ownership in a publicly traded company and is sold by the share. Each of these shares denotes a part ownership for a shareowner or shareholder of that company. Stocks are traded on exchanges all over the world, the largest is the New York Stock Exchange or NYSE. Stocks are identified by their ticker symbol. For example, General Electric is identified as GE. Individual Investors can purchase shares for themselves, at a brokerage of their choice, wherever they have an account set up. There are different types of shares, common and preferred. Most shareholders will purchase common stock. The goal is for the price per share to increase over time so the investor can have a profit that beats monies in Treasury bills or beats inflation. Over time, stocks have outperformed cash and bonds, this takes into account depressions, world wars and other world changing events.
Common Stock
Common stock, also known as ordinary shares and common shares of stock, grant the shareholder a proportion of the company's dividends, voting rights, and earnings growth. Shares that are traded and bought by retail investors are usually shares of common and preferred stock. When an investor purchases shares of common stock, they are essentially becoming an owner in the equity of the company. In the event of a liquidation or bankruptcy of a company, the common stock shareholder is one of the last creditors paid.
Common stocks often are divided into different classes such as Class A and Class B stock. Typically the Class A shares have voting rights while the Class B shares do not. Different share classes may also represent a fraction of a corresponding stock with a different share class (ex. Class B shares trade at 1/30th the price of Class A shares).
Preferred Stock
Preferred stock is special stock sold to particular institutions or individuals that grant the holder priority over common stock holders in terms of dividends and bankruptcy claims. The drawback is that preferred stocks usually have no voting rights. The price of preferred stock in a company will usually differ from the price of common stock, a reflection of its different rights and privileges.
Preferred stock can either be cumulative or noncumulative. A cumulative preferred stock requires that if a company fails to pay any dividend or any amount below the stated rate, it must make up for it at a later time. Dividends accumulate with each passed dividend period, which can be quarterly, semi-annually, or annually. When a dividend is not declared in time it is said that the dividend has "passed" and all passed dividends on a cumulative stock is a dividend in arrears. A stock that doesn't have this feature is known as a noncumulative or straight preferred stock and any dividends passed are lost forever if not declared.
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