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The benefits and risks involved in stock marketing depends on the type of stock your own. There are two kinds of shares that can be bought in stock marketing.

  • Common Stock and
  • Preferred Stock
Common / Ordinary / Equity Shares

This is also referred in stock marketing as ordinary shares. Financial loss or profit is usually greater with common stock than with preferred stock. On a lay mans point of view, the common stock owners are the people that get paid last on the earnings or assets of a company. Assume that a company goes down, owners of preferred stock will be paid first, then what is left will be divided among the owners of common stock. But if the company is liquidated after bankruptcy, common stock owners receive nothing. Equally, at the end of every financial year, the owners of preferred stock will be paid a stipulated amount of money from the profits realized, before the rest is divided among the owners of common stock as dividends.

But since dividends and equity do not have fixed cash values, holders of common stock can reap greater benefits when a company is prosperous or lose more when a company is doing poorly than holders of preferred stocks. Also they equally have the right to vote by themselves or through a proxy.

Preferred Shares

Preferred stock shareholders are usually entitled to receive a fixed dividend before any payments are made to owners of common stock. This is because they take more importance than owners of common stock.
Preferred stock holders will be paid out in assets before common stock owners and after debt holders in event of bankruptcy. Terms of the preferred stock are stated in a "Certificate of Designation".
The major set back of preferred stock is their lack of voting rights.
The benefits of preferred stock also depends on the type.
They include :

  • Cumulative Preferred Stock - If the dividend is not paid, it will accumulate for future payment.
  • Non-cumulative Preferred Stock - Dividend for this type of preferred stock will not accumulate if it is unpaid
  • Convertible Preferred Stock - This type of preferred stock carries the option to convert into a common stock at a prescribed price.

  • Exchangeable Preferred Stock - This type of preferred stock carries the option to be exchanged for some other security upon certain conditions.
  • Participating Preferred Stock - This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions.
  • Perpetual Preferred Stock - This type of preferred stock has no fixed date on which invested capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation. Most preferred stock is issued without a set redemption date.
  • Puttable Preferred Stock - These issues have a "put" privilege whereby the holder may, upon certain conditions, force the issuer to redeem shares.