The types of stocks and stock trading

What are the 3 main types of stocks and 3 types of stock trading?

3 min read

The types of stocks and stock trading

The types of stocks can be different. There are 3 stocks major groups divvy up the stock market into smaller pieces.

Here are the 3 main types of stocks:

1.Common stocks

This is the most common among types of stocks available to the public, hence the term “common stock.” Common stocks make up the majority of the buzz on Wall Street. Common stock is a simple piece of ownership in a company. Common stockholders have a right to a company’s profits and value, as well as a vote in major decisions and board elections. These are the shares that you see quoted prices for online, in newspapers or financial publications. Common stocks may or may not pay a dividend, and are considered riskier than preferred stock.

Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment.

The higher return comes at a cost since common stocks entail the most risk.

When people talk about types of stocks, in general, they are most likely referring to this type. Common shares represent ownership in a company and a part (dividends) on a portion of profits. Investors get one vote per share to elect the board members. They monitor the major decisions made by directors.

If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid.

When you purchase common stocks, you become a partial owner of the business in a way. Stocks are bought in shares. The more shares you have, the bigger your share of the profits. It commonly refers to dividends. Investors usually get one vote per share. Voting is a privilege given to a shareholder and is used in situations such as as-as the election of the board members who oversee the major decisions made by management.

2. Preferred stocks

This is another one among the types of stocks. Preferred stock represents some level of ownership in a company but regularly doesn’t come with the same voting rights. They are issued with known dividends much higher than the common stock. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder (but still after debt holders). That status makes these stocks generally safer than common stocks.

Preferred stocks can be callable, that means that the issuing company can buy back issued preferred stocks at a premium on its own accord.  

Shares can also be convertible, allowing a preferred stockholder to convert their preferred shares into common stock at some point in the future.

Also unlike a bond, the holders of the preferred stock take on most of the risk. If the company misses one of the dividend payments, it does not result in a default.

In most cases, a missed dividend payment accrues and the company will eventually pay it back to the investors. The dividend on a preferred stock must be paid before any dividend is paid to the common stockholder. Preferred stock is however junior to debt.

3. Share classes

This is considered to be one of the types of stocks for many reasons.  Common and preferred are the two main forms of stock. However, it’s also possible for companies to modify different classes of stock in any way they want. The most frequent reason for this is the company wants the voting power to remain with a certain group. Hence, different classes of shares are given different voting rights.

For example, one class of shares would be held by a select group who are given 10 votes per share while a second class would be issued to the majority of investors who are given 1 vote per share.

When there is more than one class of stock, the classes are traditionally designated as Class A and Class B.

In many instances though, the company may choose to decouple the voting rights from the shareholding by creating multiple classes of stock. The most common way this is done is via the issuance of A and B classes of shares. Shares are normally sold to the public but they may carry very little voting right. Most of the voting rights may be concentrated in the B shares, which may primarily be held by the management or the founders/founding families of the company.

This is one way of enabling the public to finance and participate in the growth of the business. But, at the same time, not giving up the ability to control the direction of the company. This may be useful for the management or the founders of the company to continue to run the business in line with their original vision.

The types of stocks and stock trading 1

The types of stocks – source WYT Finance

However, this also creates various conflicts or issues such as:

1) The A shares are less desirable and will trade at a discount to the B shares due to the limited voting rights,

2) This discourages the shareholders or an activist investor to come in and make changes to the management or the business direction that may be sorely needed, and,

3) This encourages the management or the B shareholders to run the company for their own benefit and not for the benefit of the public shareholders.

Some of the well-known companies that have their shareholding organized this way are Ford Motor Company, Google Inc, and Alibaba.

Berkshire Hathaway (ticker: BRK), the company of Warren Buffett, has two classes of stock.

The different forms are represented by placing the letter behind the ticker symbol in a form like this: “BRKa, BRKb” or “BRK.A, BRK.B”.

What are the 3 main types of stock trading?

Based on the duration of stock holding, the different types of stock trading can be classified as:

Day Trading

It is a type of stock trading where both buying and selling of a financial instrument are done on the same day. This means, all the tradings are closed before the market close for the day. Traders who participate in day trading are described as active traders or day traders. Day trading requires a fast decision and quick action.

We don’t advice this type of stock trading to a beginner.

Short Term Trading

A trade period of more than one day to a few weeks is viewed as a short term trade. Traders buy and hold in position from one day to a few weeks. A short trade is entered by creating a sell position, which is covered by buying after one day or in a few weeks.

Swing trading and pattern trading are examples of short term tradings.

Long Term Trading

In this type of stock trading, the stock is held for many months to many years. The investment decision is made by fundamental analysis of a stock. Profit from the growth of the company, dividends, and bonuses attracts this type of stock trading.

Examples of long term trading are Value Investing and Buy and hold method of investing.

The bottom line

So we can say, stocks are claims of ownership in the business that is publicly distributed.

However, this ownership can come in many different ways. We presented you with different types of stocks that you may find in your investment business. Not all of these are exactly a variant of stock ownership, but we have included these here.

Being a stock trader can be pretty profitable.

You realize that there is a great deal of benefit in stock trading. You have legitimate reasons to enter the field of stock trading. It is now time to decide what type of trader type you want to be.

All you have to do is to adopt the correct strategy in your future investment profit making!

Don’t waste your money.

 

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