The Two Main Issues of Stock
The Two Main Issues of Stock
In addition to the unofficial kinds of stocks just discussed, the market has two issues of stock
to accommodate different types of investors: common stock and preferred stock. As a very
general rule, the benefits of common stock tend to be more geared for individual investors
while those of preferred stock tend to be more geared to the needs of institutional investors
such as pension funds, mutual funds, and banks.
Common Stock
Aptly named,
common stock is the one most people think of when they hear the word stock.
It's also the kind of stock most widely bought and sold, or in investor lingo-traded. It
represents basic ownership of part of a company, as was described in the beginning of this
lesson. The owner of one share of common stock gets one vote, or one proxy, on company
matters. As stated earlier, two shares equals two votes and so on.
When the value of the company goes up as it did in the example of the apple crop freeze,
share owners make money because the value of the company has increased and
subsequently the stock has gone up also. This is called capital gain.
When discussing types of investments, you will often hear terms such as financial
"instruments" and "vehicles." These terms are not "financial terms" which imply anything
significant but simply words which are used interchangeably instead of less professionalsounding
terms such as "things" or "stuff."
Plain English
Capital is the original amount you invested in your financial instrument. A capital
gain is an appreciation of the value of the financial instrument, such as a stock, in
which the initial principal was invested. If your stock is worth more now than what
you paid for it, then you have realized a capital gain.
If you had bought stock in one of those companies that makes Widgets from apples, the
value of your company and subsequently its stock would have decreased because of the
deep freeze that destroyed the apple crop. You would have suffered what's called a capital
loss.
Capital gains and losses are one of the two ways stock make and lose money (the other
being dividends). In addition, however, other factors such as the taxes on capital gains
should always be taken into consideration. Current capital gains taxes are so high as to often
negate much of a stock's potential earnings and make many stocks unattractive to investors
for that reason. As with any investment, you always run the risk of losing the initial money you
invested (capital loss). While in such a case it would offer little if any consolation, you would,
at least, receive a tax credit for the money you lost.
When the Widget company makes money by selling all those Widgets, the owners of the
stock get a proportional cut of the profits in the form of a dividend. The investor has the
choice to take the dividend as a payment after paying taxes on the profit, or reinvesting it to
buy more stock. Dividends are related to capital gains in that any company which is
consistently making profits and paying them out in dividends will soon be discovered as a
great company. For that reason, the value of the company would eventually rise and create a
capital gain for its owner when he or she sells the stock.
