Types of Shares: Common & Preferred Classes of Stock

The stock market is as different as it gets. There are various types of stocks which are classified on different parameters including market capitalization, dividend payment, risk, price trends, etc. An essential parameter of classification includes stock classes. So, what are different types of stocks based on classes? Read on to find out.

Stocks classified on classes are primarily of two kinds, one which allows voting rights to shareholders and another which don’t. While in the former, shareholders can put forward their view regarding the decision(s) taken by the management, the latter doesn’t allow to do so.Stocks which allow voting rights to shareholders are known as common stocks, while those which don’t are called preferred stocks.

As the name suggests, common stocks are common. Note that most of the stocks are issued in this form and when investors refer to stocks, they refer to common stocks. They represent the ownership of a company and as an investor, you get the right of one vote per share to elect Board members, who are responsible for overseeing the decision of the management.Some of the common characteristics of common stocks are:

• As a holder of common stocks, you have the right to receive dividends if the declared by the firm’s Board of Directors
• As a partial owner of the company, you enjoy voting rights and have the right to cast your vote in the company’s annual general meeting
• When a company has surplus to distribute, as a common stockholder, you get the benefit of priority

Though preferred stocks give some sort of ownership, yet you don’t get voting rights when you own this type of stock of a firm. However, note that as a preferred stockholder of a company, you get the right to receive a dividend forever, unlike a common stockholder where the right to distribute dividend is based on the discretion of the Board of Directors.Another advantage of being an owner of preferred stock is that in case the company goes into liquidation, as a preferred shareholder you will get priority over the common shareholder. Also, note that if you are an owner of a preferred stock, then the company reserves the right to buy it back from you for any reason, though at a premium.

For most retail investors, common stocks are a better bet as they have the potential to offer higher returns than preferred stocks. On the other hand, if you are looking for an alternate source of income, preferred stocks make sense since they offer dividends forever. However, irrespective of the type of stock you choose, you need to hold on to it for the long-term to make real gains.

There are basically two types of shares: common stocks and preferred stocks.

1. Common stocks represent the majority of a company's outstanding stock. They are owned by the public and traded on the open market. They offer the holders voting rights and a share of the profits.
2. Preferred stocks are typically higher-yielding than common stocks and are issued to preferred shareholders. These shareholders receive preferential treatment in the event of a bankruptcy or liquidation. Preferred stocks typically pay a higher dividend than common stocks.

Common Stocks

Common stocks are the most common form of investment and represent a fraction of a company's total stock. They offer limited voting rights and are typically priced below the value of a company's underlying assets.

Preferred Stocks

Preferred stocks are similar to common stocks, but offer greater voting rights and a higher price. Because they're more expensive, preferred stocks are typically seen as a better investment than common stocks, but they can also be volatile and risky.

Hybrid Securities

Hybrid securities are a combination of two or more types of stocks. For example, a security that's composed of 50% common stock and 50% preferred stock is a hybrid security. Hybrids offer some of the benefits of both types of stocks, but they can also be more volatile and risky than either type of stock on its own.

Bond Stocks

Bond stocks are a type of security that pays periodic interest and provides stability in return. Unlike other forms of stocks, bond stocks are not traded on a stock market and are less volatile than other types of stocks .

Stocks Based on Market Capitalisation

The market capitalisation of a company is simply a measurement of the value of all shares that are currently owned by investors. Market capitalization is calculated by multiplying the number of shares owned by investors with the current market price per share. This measurement gives investors an idea of how valuable the company is.There are three types of stocks based on market capitalisation-

• Large Cap Companies Large cap companies have market caps of Rs. 20,000 crore or more.
• Mid Cap Companies Mid cap companies have market caps between Rs. 5,000 crore and Rs. 20,000 crore.
• Small Cap Companies Small cap companies have a market cap below Rs. 5,000 crore.

Growth and Value Stocks

Stocks that have the potential to increase in value are called growth stocks. Value stocks are stocks that trade at a low price relative to their underlying value.

If you're buying into a company, then you'll have two kinds of shares to choose from: Class A and Class B. Class A shares are the preferred stock, while Class B shares are the common stock. The main difference between these two classes of shares is their voting power. Holders of Class A shares can vote on important matters related to the company, while holders of Class B shares cannot.

Buying Class A or Class B shares is a common way to invest in the stock market. Purchasing these shares means you are investing in the company itself and not just its profits.Class A shares are always more expensive than Class B shares because they represent a larger share of the company’s value. If you’re deciding between the two, then it’s important to keep your investment goals in mind. Owning Class A or B shares can allow you to participate in the growth of the company.You should keep in mind that Class A shares are higher in payment priority compared to Class B shares. However, Class B shares tend to be less expensive. Hence, Class B shares can make it easy for investors to make an investment.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.