News channels, the internet and even newspapers are always bombarding us with common stock prices, telling the world if a determined share went up or down. But, what is common stock? Is the only kind of stock that exists in the market? Or are there other ones? And which one is the best for investing? Let's find out more the true common stock definition and how they can improve your future.

What Is Common Stock?

Common stock is the most basic kind of stock that a company can emit. Owning common stock from a company means that the stockowner owns a piece of the company. This ownership can be executed through his voting rights: one share, one vote. Proprietors of common stock can choose the members of the board and even decide determined policies.

Besides the voting rights, there are occasions in which common stock owners have pre-emptive rights. These rights permit common stock owners the possibility of owning the same percentage of the company in case the organizations emits new stock. So, any common stock owner can buy, if he chooses to do so, an additional percentage of stock in order to maintain his level of ownership of the corporation.

Finally, common stock owners can receive dividends for their shares. If the board of directors approves common stock dividends, a determined amount of money is distributed among the thousands of people who have bought common stock. For example, let's say that the board of directors decided to pay $0.01 per share and that a determined individual owns 10,000 shares. That means that he will receive dividends for $100.

What Is The Difference Between Common Stock And Preferred Stock?

Besides common stock, there is another type of shares that is called preferred stock. The difference between common and preferred stock is that preferred stock has additional benefits. Maybe the most important one is that the dividends obtained by a company are distributed, first, among owners of preferred stock.

But, there is an additional plus. In case the company goes through a process of insolvency or bankruptcy, the first stockowners who are going to receive a payment for their shares are the ones who own preferred stock. Meanwhile, common stock owners have to wait until the end and hope that there is some money left for them (which, in the majority of cases, doesn't happen). In this case, common stock prices won't be enough to save the capital that has been invested by the shareholder.

The second big difference is that the dividends paid by preferred stock are much bigger than the ones paid by common stock. Preferred stock owners receive pre-defined payments, while common stock owners depend on the decision of the board of directors. As a consequence, preferred stock owners can use their shares as a fixed-income security.

There are many kinds of preferred stock. For example, there is the Convertible Preferred Stock. In this kind of stock, the stock owner has the option of converting his preferred stock into common stock at a determined price. Another type of preferred stock is the Perpetual Preferred Stock, where the owner of the stock hasn't a set date for receiving their invested capital. The dividends on this type of preferred stock simply accumulate over each other until the board of directors makes a decision.

Continue to: Disadvantages Of Owning Common Stock Value