Greetings to all! Hope all of you are doing well. I am here with the second part of the Stock market learning (also on Epic Research) article. In my previous article, you read about what the stock market is? Hope you read that article and understand it. Let’s Start further.
What do you think about how a company starts? To start a company there is a need for unique ideas and obviously money to invest in. Suppose there is a company that founded with three partners and 2 investors with a great idea of the business and some investment at that time these five are the partners of the profit that the company generates. After some time this company needs more amount to invest in for the growth of the company for that it needs to sell some shares that would definitely decrease the percentage of shares these five have. Since the company grows the early investors sell their stocks to earn the profit on their investments. That is why the company need more money and it allows a public figure to purchases its share. The investment of that five of the company is private and the stock that is sold to the public figure is public stock. Is it hard for you to understand? Don’t go for the deep sense, just keep in mind that not only an investors ( like your friends, family member or you too) purchase shares but also the insider of that particular company also have some percentage of shares.
There are mainly two types of stock. Such are:
1. Common Stock: Maybe you heard about it because commonly most of people talk about this kind of stock. These are the stocks that have a higher rate of return than the bond (don’t confuse with the term “bond” I will explain it further in this article). There is more risk in these stocks. If you purchase common stock of any company you have one voting right with it, that help you to vote board of directors of that particular company. So I think through these details you get the simple definition of the common stock that is “ Common stock is the type of the stock in which along with the stock you also have one voting right”. Now talk about another type of the stock i.e. Preferred Stock.
2. Preferred stock: This is another type of stock. In this type of the stock, you don’t have a voting right (in some cases you have a voting right in preferred stock, so it depends on the company of which stock you purchased). It has less risk when compared with the common stock. The company has a right to repurchase preferred stock from you when required or when such a situation occurred (only if you are the purchaser of the preferred share of that company).
When we look at the above two types we only get a difference of voting right between these two. But there is more difference between them. One of the difference is that there is a fixed dividend on the preferred stock whereas dividend of common stock vary (In some cases there is very dividend on preferred stock too, it depends on the company). The another and the important difference is that when a company is out of business the dividend of the company firstly distributed to the creditors, bondholders and then the preferred stockholder and after that, if some amount remains it distributed to the common stockholders equally. So there is no guarantee of the returns on the common stock. This is the reason that common stock have more risk.
When a company needs money to pay off bills, or for growth or for some other reason rather than taking a loan from the bank it takes money from the public figure and provides them a bond at a fixed rate of return. At the stage of the bankrupt of the company, it firstly pays to the bondholders.
A company can have more classes of the stocks it totally based on the company to company, that fits the investors of the company. A company has classes of the stocks to concentrated on the voting power. How a company does it? By dividing investors into groups. One group have ten voting rights per share but this group has a limited member, and another group has one voting right per share.