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The Five Types of Stock

In this lesson you will learn how the goals of stock and the conditions of their issuing

companies are described using Wall Street terms.

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Stock Characteristics

Companies, like almost anything else, are available for purchase and sale. Your daily

newspaper certainly covers the more noteworthy purchases such as AOL's recent purchase

of Time Warner. In addition, however, and on a much smaller scale, individuals can purchase

a franchise restaurant like McDonald's, a small bed and breakfast, or the local corner store.

Even professional practices such as a dentistry or professional massage parlor are usually

sold when the proprietor retires or leaves the profession. As these businesses vary, so does

the accompanying stock. Over the years, investors have come up with descriptive names to

characterize the differences between these stocks.

This is not meant to imply that all stocks bear little resemblance to each other. In fact, stocks

actually tend to be more similar in most aspects. For example, all horses are basically the

same-four legs, one mane, and so on. A race horse, however, varies from a plow horse

primarily because of what the owner expects from it, namely a race horse will try to win races

and a plow horse will pull a plow. As a result, the horses would differ in what they would be

fed, what kinds of ailments would be more common to each, and how they would be treated.

So, too, most stocks have particular aims that define them. One stock may attempt to provide

higher dividends, while another may focus on higher capital gains, and yet another may focus

on raising quick money for the issuing company immediately. Due to these differing focuses,

companies will treat their stocks accordingly in order to maximize the stock's ability to meet

their goals.

Goals are usually determined when a stock is first issued by the company in what is known

as an initial public offering. This is nothing more than a descriptive name for the first time a

stock is available for sale. It is also known as a company "going public," which, as the name

implies, means that portions of the company, or shares of stock, are now available for the

public to purchase. The decision to "go public" and what the aims of the stock will be are

pretty much determined by the board of directors or whoever the owner of the business was

before it went public. Let me point out that these decisions are fluid and please note that

many companies do not go public at all. Many are owned by a person or a family that keeps

them in tight control. No company is ever required to go public.

You, as an investor, have the responsibility to determine what use you want to make of the

stock, your goal in purchasing the stock, and which kind of stock would most likely fulfill your

goal.

The following classifications are not official and are not determined by any governing body.

They are also not set in stone-what is considered an income stock to one may be

considered a penny stock to another. Like many industry terms, these are fluid, intended to

cover as many angles as possible. For example, when gambling, no set size bet actually

constitutes a high roller. What constitutes a fortune to one person is but a drop in the hat to

the next. So too, these terms are not meant to imply anything definitive, but rather to be used

as an aid when discussing and studying stock.