The stock market gives you the chance to own a share of a company or a corporation by buying shares from it, as long as it’s publicly listed. In the stock market, you can generally find a lot of companies to choose from to do forex trading, and it goes without saying that the variety of companies in the stock market calls for a variety of stocks.
However, there are only two kinds of stocks that you will have to consider. These two types of stocks have their own pros and cons, and it’s important for you to know what these things are if you want to invest successfully in the stock market.
But first, let’s talk about how stocks are made in the first place.
How are stocks made?
When a company is first established, it is still a private business, meaning the only shareholders are the co-founders and early investors. For instance, a startup with two founders and one investor will grant each of those people 1/3 of the company’s shares.
As the company grows, it needs more capital to expand. The company can issue more shares to other investors, meaning the co-founders and the early investor will have lower number of shares. In this phase, the company is still private, meaning they can’t exchange the stocks easily and the number of investors are still quite low.
As the company continues to grow, there will be a point that some investors will want to monetize their investments in the company, meaning they will sell their shares. At the same time, the company will usually find that it needs more investors to continue to expand.
This is when the company undergoes an initial public offering, which will transform it to a public company.
When people go around and blabber about stocks and the stock market, it’s almost certain they’re talking about common stocks. In part, this is because a great majority of stocks are issued in this form.
When you hold a common stocks, you have a claim on the profits of the company. In addition to that, you acquire voting rights, which means you can take part in the decision-making process in the company. You can vote for or against a decision generally based on the number of shares you own in your forex trading account type.
Historically, common stocks has tended to yield higher returns than corporate bonds through capital growth. The downside to common stocks is that you will not get paid first in case the company goes out of business.
Preferred stocks are very similar to bonds in their function. They also normally do not come with voting rights, though this one may be subject to the company’s decision.
When you have preferred stocks, you usually have guaranteed fixed dividend in perpetuity. This is very unlike common stocks, which are never guaranteed to pay fixed dividends. In fact, most common stocks do not pay dividends at all.
Meanwhile, a preferred stock tend to have the quality of being callable, meaning the company can repurchase it at any time for any reason.
Another advantage of owning preferred stocks is that in case the company goes bankrupt, preferred shareholders will get paid first.
Overall, you can think of preferred stocks as the missing link between bonds and common stocks.