Penny Stocks, Common Stocks and Preferred Stocks
Stocks April 19th, 2009
As you delve into the world of online stock trading, you should make sure you have a strong grasp on the basics. For example, everyone hears terms like stocks and stock trading all the time. But you would be surprised how many people don’t actually understand stocks at all. With this article I’ll get you started with a discussion of the different types of stocks.
While we’ll discuss preferred stock and penny stock later, the most commonly traded stock is in fact the common stock. Common stock is issued far more than any other kind of stock. When most people talk stocks, they’re talking common stocks. Common stocks provide the ability to own share in a corporation as well as to share in the corporation’s profits through dividends.
If you’re looking for the biggest long haul payout, common stocks are the way to go. But note that they’re also the most risky of investments. Consider that when a corporation has to go bankrupt and must liquidate, preferred shareholders, bondholders and creditors are paid out long before common stockholders.
The second main kind of stock is the preferred stock. This type of stock enjoys a greater ownership role in the corporation. This doesn’t mean it has the same voting rights, but it usually does provide guaranteed fixed dividends.
Fixed dividends are a very potent benefit over common stock because those common stocks have varying dividends, never guaranteed. Preferred stockholders are also paid out before common stockholders during bankruptcy and liquidation. Preferred stocks also provide the benefit, in most cases, of being callable. When a stock is callable, a corporation can buy that stock at any time, most commonly at a premium price.
People frequently refer to preferred stocks as debt not equity. It might help to see them as a mix of a bond and a common stock.
Within these two types of stock shares, you may also find different classes created by each corporation for specific operational purposes. This creates leverage for the corporation to better manage voting rights, thus giving greater end control to a predefined class of stocks than to the other class of stock shares.
Regardless of whether it is a common stock or a preferred stock, an additional class of stock delineation will determine the voting right of that stock. Some stocks will simply have a greater number of votes on corporate policy with each owned share than other classes of the same stock.
And while it may belong in a different conversation altogether, the last type of stock you’ll see discussed among online traders is the penny stock. Penny stocks, also referred to as micro cap stocks when classifying them by market capitalization rather than stock price, are really just normal stocks traded at a lower market value. Any stock can become a penny stock and many micro cap stocks become standard stocks traded on NYSE or NASDAQ.
You’ll find a wide variety of definitions here, but generally speaking a penny stock trades for under five dollars and a micro cap stock has a market capitalization between 250 and 50 million dollars. One last delineation for a penny stock is any stock traded off a security exchange and traded on the OTCBB or the Pink Sheets.
What you must consider most when evaluating a penny stock is how it will be far more volatile and susceptible to market manipulation and stock fraud.
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