Type Of Stock

What types of stocks are there?

Ordinary Stocks: When purchasing an ordinary stock, you own a share of the company. This entitles you to receive profits from the operations of the company in the form of dividends. At the annual general meeting (also referred to as an AGM), you have voting rights. Ordinary stocks are what you will start to trade in and most traders never venture beyond this.

There are, however, other types of securities and these are:

Preferential Stocks: A preference stock is different from an ordinary stock. Preference stockholders receive dividends before dividends on ordinary stocks are announced. If the company is wound up, preference stockholders rank above ordinary stockholders in the distribution of assets. Preference stocks can often have a fixed dividend rate.

Contributing Stocks: A contributing stock is one that is not fully paid for and requires the holder to make payments at a future date.

Bonus Issue: This is a free issue of stocks to the stockholders based on the number of stocks already owned.

Rights Issue: A rights issue can be granted to stockholders to buy stocks in the company, often below market price.

Derivatives: There are also securities you can trade on the market that derive their price from the parent stocks. There are two types – Options and Warrants – and these are collectively known as Derivatives.

Option: An option can best be described as a contract between two parties giving the taker (buyer) the right to buy or sell a parcel of stocks at a predetermined price on or before a predetermined date.

There are two parties involved in an options contract, the writer or seller and the taker or buyer. The writer writes the option and has the obligation of accepting or delivering the stocks. The takers have the right, but not the obligation, to buy or sell the stocks.

There are two types of options – Calls and Puts.

Call: A call option gives the buyer the option to buy stocks from the option writer.You are 'calling' stocks away from the owner.

Put: A put option gives the buyer the option to sell stocks to the option writer.You are 'putting' stocks to the writer.

There are many advantages of options trading, the least of which is leverage. An option can be bought and sold for a fraction of the stock price, giving an effective higher return (or loss) on investment for a stock price move.

Warrants: Warrants, like options, derive their price from the parent security. Warrants though are issued by banks and other financial institutions and are classified based on whether they have an investment or trading purpose.

Warrants may be issued over securities, a portfolio of securities, a stock price index, currency or commodities.