03 - Stock Basics: Different Types of Stock

There are two main types of stocks: common stock and preferred stock.

Common Stock
Common stock is, well, common. When people talk about stocks in general they are most likely referring to this type. In fact, the majority of stock issued is in this form. We basically went over features of common stock on the last page. Common shares represents ownership in a company and a claim on a portion of profits (dividends). Investors get one vote per share to elect the board members who oversee the major decisions made by management.

In the long term, common stock, by means of capital growth, yields higher returns than other investment security. This higher return comes at a cost as common stocks entail the most risk. Should a company go bankrupt and liquidate the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid.

Preferred Stock
Preferred stock represents some degree of ownership in a company but usually don't have the same voting rights (this may vary depending on the company). On preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock that has variable dividends that are never guaranteed. Another advantage is 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).

Some people consider preferred to be more like debt than equity. A good way to think of these shares is in-between bonds and common shares. (If you don't understand bonds make sure to check out our bond tutorial as well).

Different Classes of Stock
Common and preferred are the two main forms but it's also possible for companies to customize different classes of stock in just about any way they want. The most common reason for this is when a company wants voting power to remain with a certain group and so shares are given different voting rights. For example, one class of shares would be held by a select group and given 10 votes per share while a second class would be issued to the majority of investors with 1 vote per share.

When there is more than one class of stock the different classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), the company of Warren Buffett (one of the greatest investors of all time), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like: "BRKa, BRKb" or "BRK.A, BRK.B".