A newly founded company has only its founders and shareholders as investors. When they want to expand their business, they issue shares to outside investors to gain more capital for their business. The founders may end up with lower shares than they had, but they create a growth potential for their business.
Below are the different types of stocks that are issued by companies
The common stock is generally what people refer to when they are talking about stocks. Most of the stock issued to individuals is issued in this form. Your common stock represents your ownership, claim, or dividends in a company. When you invest in a common stock, you get one vote in each share to elect a member of the board.
In the long run, a common stock has potential to grow or yield high return as compared to other investments. Do not be fooled, common stock is still a risky investment. If the company happens to go bankrupt, stock holders do not receive any money until all the other investors including bondholders and shareholders have been paid first. Common stock has variable dividends which are affected by sales, profit, market fluctuations and interest rates.
When you purchase an income stock, you get a quarterly dividend. Income stocks can be found in well established, high quality and profitable industries. Income stocks are a good source of retirement income; they are steady and guaranteed which means you can rely on them as a source of living. The dividends and appreciation of income stocks generate more money than other bonds or fixed investments.
This represents some ownership in a company but does not represent the same rights like the common stock. The rules of preferred stocks vary depending on the company. The best thing about a preferred stock share is you are guaranteed a fixed dividend.
In the event of a bankruptcy or liquidation, the preferred stock holders will be paid off before common stock holders. The company can purchase shares form preferred stock holders when they wish to, which makes this slightly better than a common stock.
They are characterised as low price to dividends, earnings and book ratio. The value stocks have a lower price, as a result of management issues and financial problems in companies. the low price has not stopped the value stocks from growing in the stock industry.
When considering value stocks, investors look at matters beyond the financial issue of a company.
If a company has constant profits that are generated fast, you can invest in their growth stocks. When their profits increase, it leads to a consequent increase in the stock price. Most companies use the profits to invest in their businesses rather than pay dividends to their stock owners. They do this with the hope stock holders will keep their stocks for a much bigger profit. This trick works for growth stock holders looking to make more profits from the company.
Taking on an investment can be hard when you have no idea where to begin. Before you invest your money in any companies, do your research on their business and its potential growth.