Beginner's Guide to Stock Basics

Which Type of Stock Should You Pick?

Wow, our jeep just rounded a clearing, and there they are -- a pride of lions (stocks). It's interesting -- there seem to be two really different types. The two types of lions we're looking at are preferred stocks and common stocks.

"What's the difference?," you ask.

Remember, regardless of which type of stock you buy, purchasing stock makes you a part owner, or shareholder, of a company.

Let's begin with preferred stock.

Companies that sell preferred stock are actually offering a blend of a more aggressive investment (stock) and a more conservative one (bond). This combination means that the price of preferred stock does not fluctuate as much as the price of common stock. That's why many risk-averse investors favor preferred stock.

Another advantage to owning preferred stock is that it almost always pays a dividend to shareholders.

Companies pay dividends to preferred stock shareholders before they pay dividends to common-stock shareholders.

Dividends accumulate if the company's board of directors decides to put a freeze on divvying up profits because it doesn't have the financial resources.

If the company goes bankrupt, preferred stockholders have a claim to any assets ahead of common stockholders.

On the other hand, preferred stockholders don't have any voting rights. To many investors, this doesn't really matter, but if, as an owner, you are passionate about management decisions at the company, you may want the right to vote. If so, then preferred stock is not for you.