Different Types of Stocks and Bonds
Stocks are all the stocks held by a corporation in common. In American English, the stocks are collectively referred to as “stock.” Each share of a particular stock represents a fractional ownership of that corporation in ratio to the total number of outstanding shares. The ownership percentage of the stocks varies with the price and the status of the company. A stock may be bought or sold by an individual or by a corporation. The same process, usually through a broker or dealer, gives rise to the acquisition and the sale of stocks.
Stocks are divided into two categories, common stocks and preferred stocks. Common stocks are the ones in which most of the shareholders are entitled to vote. For instance, if there are 100 shareholders, each of them can purchase one share of a common stock. However, for a company to list on the New York Stock Exchange or the NASDAQ, it must have at least a million shareholders. This allows the corporation to trade more than one stock during any single day.
Preferred stocks, on the other hand, are those in which only a certain number of shareholders are entitled to vote. For instance, if there are 100 shareholders, each of them can purchase one share. However, for a corporation to list on the New York Stock Exchange or the NASDAQ, it has to have at least a million shareholders. There are two types of dividends to a preferred stock: ordinary dividends and capital dividend. Ordinary dividends are paid to the shareholders on a monthly basis, while capital dividend is paid only on a quarterly basis. This is important because regular dividends can affect the financial statements and ratios.
Capital gains tax is also levied on dividends. This is to ensure that the corporate sector is not able to accumulate excessive wealth over a long period of time, thereby undermining the overall efficiency of society. The purpose of taxes is to provide a revenue source for the government, while discouraging the wealthy individuals from accumulating large fortunes in the name of their business interests. If there are no restrictions as to how the money is used and just where it is invested, then this can serve to be an advantage for some stocks. Some companies who receive dividends regularly may receive an exemption on the income tax owed on them.
In general, stocks and bonds are both highly risky investments. Stocks represent ownership rights in the underlying property. Bonds, however, represent obligations of payment. Therefore, there is a greater risk of losing the principal amount that is put up as a security in the bond.
There are also common stock and preferred stock ownership types. A common stock is a share in a company’s stock ownership structure that has the same rights as a traditional shareholder. Preferred stocks, on the other hand, are stocks that are owned by the corporation but are sold to individual stockholders. They have greater voting rights than common stock and enjoy first rights on dividends. As such, they have been seen more recently as a desirable investment vehicle.