Different Types of Stocks or Shares
As we learned from the previous publication (Stocks Basics), we know that there are two types of stocks:
(i) Equity Shares or common stocks.
(ii) Preference Shares or Preferred Stocks.
Equity Shares or Common Stocks are offered to the common people either through Primary Market [such as IPO (Initial Public Offering), FPO (Follow-on Public Offering), Rights Issue] or through Secondary Market [Such as from Stock Exchanges].
On contrary, Preference Shares or Preferred Stocks are offered directly by the company itself, to its internal stakeholders only.
The Journey From Startup to IPO
Most of the Companies start with private owners and investors as the shareholders. As the company grows and there is a need for more capital, the company issues shares to the investors to increase the capital investment. As this stage, the company shares are considered to be private.
But there may be situations where the business grows farther and company needs more capital which the primary investors can’t provide, or when the primary investors want to sell their shares to realize their profit. This is the point of time when the company’s management thinks about selling shares to common public initially as IPO (Initial Public Offering) then later in form of FPO, Offer-For-Sale, & Rights issue [Read More: How is The IPO Price Determined?].
Preference Shares or Preferred Stocks
Preferred stocks or preference shares function more similarly to bonds and typically doesn't come with the voting rights. These Stocks are issued to selected internal peoples (directors, investors of the company), who already has a close relationship with the company. When these stocks are issued they are usually not immediately sellable. At the initial stage, these are more like bonds and it converts to shares after a certain period of time.
With preferred stocks, investors are usually provided a fixed dividend payout year after year. This is different from common stocks (or equity shares) which comes with variable dividend payouts that are declared by the board of directors and never guaranteed. In fact, many firms don't pay dividends to common stock at all. [See our guide explaining dividend, dividend rate, and dividend ratio]
Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder. Preferred stocks or preference shares might also be “callable,” that means that the company has the option to re-purchase the shares from preferred shareholders at any time for any reason (usually by paying a premium amount).
Equity Shares or Common Stocks
When general people talk about shares or stocks, they generally refer to common stocks or equity stocks. In fact, the great majority of stocks are issued is in this form and sold in secondary market through stock exchanges [e.g.- NSE & BSE (India), NASDAQ & NYSE (US), LSE (UK) etc] and regulated by financial regulatory authorities [e.g.- SEBI (India), SEC (US), FCA (UK) etc]. Common Shares are eligible for receiving claims on profits (dividends), but the decision for dividend payout is subject to the approval from the board of directors.
Equity shares are released for public trading through different channels, they are IPO (Initial Public Offering), FPO (Follow-On Public Offering), and Rights Issue. Sometimes company issue Bonus shares, but that has some different story altogether.
We, common peoples, are not entitled to buy stocks directly from company or market. For that, we need have accounts with stockbrokers, who purchases or sells stocks according to our given instructions.
To know more about broker accounts you require for share or stock trading Check This Article.