Stock Knowledge

Although this is mainly a blog for forex, I've decided to dedicate a post to stocks since that is what I am currently learning in my finance course. Let's begin by giving beginner stock traders a crash course lesson in stocks. First off, there are two types of stocks: preferred stocks and common stocks. Each of these types of stocks have their own advantages. I will first start off by discussing preferred stock.

Preferred Stock

Preferred stock is often referred to as a hybrid security because it has many characteristics of both common stock and bonds. These types of stocks have many features that include cumulative dividends, protective provisions, convertibility, and retirement features. Cumulative feature requires that all past, unpaid preferred stock dividends be paid before any common stock dividends are declared. Simply put, preferred stock holders have priority over common stock holders. Protective provisions generally allow for voting rights in the event of nonpayment of dividends. They restrict the payment of common stock dividends if sinking-fund payments are not met or if the firm is in financial difficulty. Convertible preferred stock can, at the discretion of the holder, be converted into a predetermined number of shares of common stock. One noteworthy statistic is that almost one-third of preferred issued today has a convertibility feature. Lastly, stock issuing firms generally provide for some method of retiring the stock such as a call provision or sinking-fund provision.

Common Stock

Common stocks is a certificate that indicates ownership in a corporation. When you buy a share, you buy a part of the company and attain ownership rights in proportion to the amount of shares you buy. Common stockholders are considered the true owners of the firm. On the other hand, bondholders and preferred stockholders are considered more as creditors. Like preferred stocks, common stocks also have some features. These features include claim on income, claim on assets, voting rights, and preemptive rights. Common shareholders have the right to residual income after bondholders and preferred stockholders have been paid. Common stock also has a residual claim on assets in the case of liquidation. Generally, if bankruptcy occurs, claims on the common shareholders are typically not satisfied.When it comes to voting rights, common stockholders are the only security holders with a vote. Lastly, the preemptive right entitles the common shareholder to maintain a proportionate share of ownership in the firm.