Notes

Stock is the measure of ownership in a company, existing in common stock and preferred stock which is given priority in several cases. Explore each type of stock to identify the advantages to each.
Owning a Company
With all the talk about the stock market, it's easy to get lost. Financial whiz kids keep talking about derivatives, options, shorting, and commodities when all you want to do is go back to basics and save money for the future. After all, is the whole financial system just a giant house of cards ready to come crashing down when one of these geniuses forgets a decimal point on a calculation?

If you listen to pundits and politicians, that very well may be the case. But, what is the stock market, exactly? Obviously it is a place to buy and sell stocks, but what is a stock? A stock is a share of ownership in a company. The stock market is a giant marketplace where instead of buying food or clothing you can buy shares of the companies that make the food or clothing or widgets or anything else you can imagine. However, to fully understand what a stock is, you have to understand the difference in two types of stock - common stock and preferred stock.

Common Stock
When most people think of a stock, they think of common stock. At its most fundamental level, common stock refers to a share in a company that allows the holder to vote in shareholder elections. Now, this is a big deal! Let's say that you bought stock in a company that you hated. Surely you can think of some. By owning just one share, that company is required to send you mail about the performance of the company and invite you to an annual shareholder's meeting. Mostly, these are pretty mundane affairs, but some rival the latest tech releases. At this meeting, you have the right to vote, to ask questions, and generally act like you own the place. After all, you do!

However, common stock does not mean that you will get a share of the profits every so often. This share of the profits, known as a dividend, can be given to shareholders. However, many companies choose instead to simply reinvest profits into the business. Note that this should not be confused with the stockholder's option to sell the stock, which is the price you most often hear about. Stock prices are based off the total value of a company, while dividends are based off a particular time period's profits. In fact, a company may have a stock price of over $100 but only choose to pay a dividend per stock of about twenty-five cents every three months.

Preferred Stock
Preferred stock holders, on the other hand, get any preferential treatment when it comes to a dividend. That doesn't mean that they always get one, but if anyone in a company is going to get a dividend, it is going to be the people who own preferred stock. Remember, they can sell their share at any time for the stock price, but the dividend is an added payment for just owning the stock. Preferred stock holders also have another handy benefit, although it is one they hope to never use. If a company goes bankrupt, preferred stock holders get some of their money back as the company's assets are sold off. A common stock holder is the last on the list of people to pay back.

Still, being a preferred stock holder has one major disadvantage - you can only rarely vote. In fact, preferred stock holders often only get to vote on issues related to their preferred stock, such as issuing more preferred stock or if a company should do something massive, like buy another firm.

Which Is Better?
Many people may be running to an option as to which kind of stock is better. While everyone's financial situation is different, a few broad generalizations can be made. Preferred stock is most useful for people who don't want to take any big gambles in the market. This is especially true if they are investing in a stock that pays a dividend because that's money in the bank. However, the price of preferred stock will not grow as fast as that of common stock. Common stock, on the other hand, is best suited for someone looking for much larger growth. There is more risk involved, but in finance, the greater the risk, the greater the reward.

Lesson Summary
In this lesson, we looked at two different types of stock, preferred stock and common stock. Remember that stock just refers to a share of ownership in a company. Preferred stock refers to those shares that have little or no control over a company but just expect a chunk of the profits every so often. On the other hand, common stock refers to those shares that have increased control over the company but a smaller likelihood of a dividend. We also saw that preferred stock tends to be a better option for people seeking greater stability, while common stock is better for those looking for their money to grow with some risk.