Frequently asked questions
This is the most common stock issued by a company which entitles shareholders (ownership interests) to participate in the growth and profit of the company that they invest in. When purchasing shares in the stock market you are in most cases buying common shares. The income for common stock is derived from the growth of the company paid out as dividends to its shareholders.Preferred stock
These generally do not have voting rights nor provide the ability to participate in the appreciation value of the company, however in some companies they have features of the common shares, such as voting rights and holding appreciation value. Preferred stock come with certain payment terms that take precedence over common stock such as a set dividend paid monthly, quarterly or annually. In the case of the company becoming insolvent after the creditors have been paid, preferred stock holders will be compensated before common stock shareholders. They may also have set redemption terms, where the preferred stock holder can have them redeemed at a favourable price.
These refer to an ownership stake in a company and are generally issued (sold) by the company as part of a capital raising exercise used for growth.Bonds
These are basically loans to an institution and are regarded as debt indicated in the balance sheet of a company as liabilities, more commonly issued for-profit.Summary
When investing in stock, you benefit when the company does well, however, there are many factors which impact a company’s profitability, e.g. consumers’ decisions on spending to incoming new technologies by competitors, and consequently face the risk of the company doing poorly or its stock going down. In return for the risks taken as an investor, you get more reward as opposed to bonds. Investing in stocks is therefore the best option when you want good profits and are in a position to take risks.