If you are totally new to investing and you are getting lost in the jargons. This section contain enough material so that after reading that you can learn the basics.
COMMON STOCK: It represents a part (share) ownership stake in a business. So common stocks are generally called shares. Shareholders of a company are like co-owners of the company. They needn’t participate in the functioning of the company but they need to select Independent Board of Directors who will look after their interest and can cast their vote regarding important decisions of company. If a company has 1,00,000 common stocks then 1 stock represents 1/1,00,000 part of the company. So the price of a common stock is directly related to company’s prospects. But Common stockholders are not entitled to any guaranteed return on their investments. They entitled to the profit which is left after paying interests on debt, dividends on preferred stock etc. Even though some companies distribute part of their earnings as dividends to shareholders the decision of paying or not paying it depends on management of the company. Even in an liquidation process when the company sells of its assets common stockholders receive what is left after paying to debt and preferred-stock holders. Generally common stocks contain chances of higher profits(in terms of price appreciation) but also high risk. These common stocks are traded in stock exchanges(like NSE and BSE) to purchase them you should have an Demat account.
Generally all common stocks are equal but some companies have different types of common stocks for example:
Voting and Non-voting shares : Some companies have two types of shares voting and Non-voting. G Difference between them is that voting stockholders have voting rights which Non-voting stockholders don’t have. Example- Google.
Class A and Class B shares: They are almost identical but differ in their market price and in some cases in voting rights. Example: Berkshire Hathway has Class A and Class B shares. Class B is economically worth 1/30 of class A share and has 1/200 the voting right of class A share.
PREFERRED STOCK: It is a kind of hybrid between bonds and common stocks. Preferred stockholders are entitled to fixed dividend but they have no share in profits of company. But the dividends are compulsory only if company distributes dividends to common stockholders. If the company doesn’t pay dividends to common stockholders it as no obligation for paying dividends to preferred stocks.
CONVERTIBLE ISSUES: These are special type of preferred stocks which have all the characteristics of a preferred stock but have one significant difference. They can be converted into fixed number of common stocks within a given time. The exact number of common stock to which a preffered stock can be converted is decided at the time of issue of preferred stock.
For example: If a company XYZ issue convertibles of price 10,000 with 12% p.a dividend payment which can be coverted into 250 stocks of the company within 5 years. The holder of the convertible has the right to receive dividends and can convert is preferred stocks into common stocks at any time in the 5 years.
STOCK-OPTION WARRANTS: These are long term rights to buy common stocks at predetermined prices.It is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date.
Warrants and options(options is explained in post on derivatives) are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to “endow with the right”, which is only slightly different than the meaning of option.