What’s the first thought that comes to mind when you think about investing? If you are like most people, the first thought that comes to your mind is STOCKS, and considering investing in stocks.
This is the most common method of investing; however, not the only manner to invest your money and allow compound interest to work in your favor. The following article will shine light on investing in stocks.
The differences of common stock and preferred stock, and to share or not to share the perplexing question that looms in the minds of all investor at one time or another.
What is investing in stocks?
Owning stock in a corporation grants the holder of the stock ownership rights in that corporation. For example, if there were 100 shares of stock issued for Essence of Zion Photography, and you owned 10 shares of stock you would have a 10% ownership stake in this company.
Therefore, if you have 10% of the shares in this company you are investing in stocks. To dive a bit deeper the next section will cover the two types of stocks: common stock and preferred stock and both grant various rights for the owner of the stock.
What’s the difference between common stock and preferred stock?
Common Stock: Has two major privileges granted to the shareholder. The shareholder receives the right to dividends (a percentage of the corporations earnings which can be in the form of cash or shares), and the ability to vote at shareholder meetings.
In the event that a corporation goes bankrupt common stock holders will fall inline behind higher priority liability holders in that corporation.
Preferred Stock: Owners usually do not have voting rights. However, they do have preference over the assets of the company before common stock holders.
For example, if it is determined by the corporation that preferred shareholders are to receive a 5% dividend. Then, the owners of the preferred shares must be paid the dividend owed to them before common stock holders can receive their dividend payments.
Moreover, if the corporation goes bankrupt; during the liquidation period where shareholders are paid what they are due, preferred stock holders will receive compensation before common stock holders.
To share or not to share that is the question
In some cases you may be faced with the option to buy Class A or Class B shares in a given corporation. The difference between the Classes of shares is determined by the corporation.
As an example a corporation could split their shares from one class to two classes in order to protect the interest of a majority stakeholder. Furthermore, the corporation can assign class B shares to have 10 voting rights, and class A shares to have 1 voting right.
In this case class B shares may receive priority over class A share similar to preferred stock mentioned above. You may be asking yourself in what circumstances will a corporation split their shares into classes.
One of the main reasons to split their shares is to allow the founder or controlling organization to maintain majority control over the corporation. For example, if a small number of investors owned the majority of the stocks in a company then those investors will be able control the company and vote down or push agendas that they feel are important to them, but may not be feasible for the organization.
On the other hand, the founder or initial controlling organization can split their shares into classes and name their shares class B as in the above example and control 10 votes per share of stock.
Therefore, if the founder controlled 51 of the 100 shares of stock before the stock split; then, after the split the founder will have 510 voting rights instead of 51 that they had before the split.
The remaining 49 shares will be class A shares worth 1 voting right per share. Thus, resulting in the founders class B shares out weighing the Class A shares 10 to 1.
Learning about the stock market is not particularly difficult. The key is to start with a good foundation when considering investing in stocks.
A Small Investment will continue to provide knowledge for the basic understanding as well as a complete framework to learn and grow your investing muscles.
Which shares of stock would you prefer to have if you had a choice to own common or preferred stocks?
Leave a comment below.
Do you suggest investing in preferred stock or common stock? Which would be more beneficial?
Both have their respective value to various investors. If the investor plans on owning any substantial shares in a company, and would like to vote at the share holders meetings then choosing the stock with voting rights will be beneficial. However, in order for the votes to make a difference during the share holder meeting the investor would need to have a substantial percentage of the shares.