After watching this video lesson, you will understand the differences between preferred stocks and regular stocks. You'll also learn how to calculate your dividends and earnings on your stocks when you sell them.
Many large companies are owned by the public. These companies sell equity, or ownership of the company to the public, in the form of common stock. Anybody can be a part owner of a large business, like the soda companies, by just buying one stock. How much do these stocks cost? It depends on how well the company is doing. One stock from a large company that is doing well may cost you $120 per stock, while another stock from a smaller company may only cost $1.
Each stock represents a percentage ownership in the company. What that percentage is depends on how many stocks the company has available. For example, if you bought 1 stock from a company with a total of 500 stocks, you would have a 1/500 or 0.002 or 0.2 percentage ownership in the company. The more stocks you own or purchase, the more of the company you own.
People will buy and sell stocks to make money. For example, if you bought some stock for $4 each from a company and then later sold it for $10 per stock when the company was doing better, you would have gained $6 per stock from selling your stocks in that company. If you purchased regular stocks, you would also have voting rights based on your percentage ownership.
Some companies, though, also offer what is called preferred stock. These are shares of ownership with no voting rights. If you purchase these kinds of stocks, you would have a percentage ownership in the company but you wouldn't have any say in what the company does. You don't get to vote. What you do get is you get to benefit from the profits of the company. When the company makes a lot of money, then you are the first in line to receive those benefits.
These benefits are given in the form of dividends, earnings shared with stockholders. Companies will tell you how much your dividend is per stock. For example, a soda company might say that their dividends are $1 per stock. If you owned 20 stocks in this soda company, then you would get 1*20 or $20 when dividends are distributed to the stockholders. If you owned preferred stock, then you would be first in line to receive these dividends. Companies pay out dividends first to the preferred stock holders and then to the regular stock holders.
The earnings you can make from selling your preferred stock is the same as for regular stocks. For example, say you bought 20 preferred stocks in a soda company for $15 per preferred stock. You would have paid 15*20 or $300 to purchase these 20 stocks. Now, if you sold them several years later for $25 per preferred stock, you would get paid 25*20 or $500. Subtracting the amount you originally paid, you would have a profit of 500 - 300 or $200. In the real world though, you might have fees associated with these transactions that you have to consider. But for our example, we are keeping it simple to show you how you can make money from selling stocks. This example works for both preferred stocks and regular stocks.
What did we learn?
We learned that stocks are shares of ownership in a company. When you buy stocks in a company, you are buying a percentage of that company. Regular stocks also give you voting rights based on the number of stocks you own.
Some companies also offer what are called preferred stocks. These are shares of ownership with no voting rights. This means that if you own preferred stocks, you benefit when the company grows and makes money, but you have no say in what the company does. What you do get is that when a company distributes its dividends, earnings shared with stockholders, it will give preferred stock holders their dividends first before regular stock holders. Dividends are usually stated as a dollar amount per stock. You can also make money by buying and selling preferred stock the same way as regular stock. If you sell your stock for more than what you bought it for, you will make money.
Upon completing this lesson, you will be able to:
- Explain what stocks are
- Differentiate between regular stocks and preferred stocks
- Identify the advantage of owning preferred stocks
- Define dividends and explain another way to make money off of stocks