What is a Stock? - Definition, Types & Examples

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  • 0:00 Definition Of Stocks
  • 0:50 Types Of Stocks
  • 2:55 Example Of Stocks In Play
  • 4:35 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will explore the concept of ownership in a company through stock. Also in this lesson, different types of stocks will be explained and examples will be given.

Definition of Stocks

There are two types of stock. The first is common stock, which is typically what is meant when referring to 'stock'.

Common stock is an investment security which represents ownership in a company. You may hear a friend or relative state they own stock (commonly referred to as shares) of a particular company. They are referring to common stock. If your friend or relative owns a few shares of that company, they are therefore an owner of the company.

Preferred stock is an investment security which, depending on the issuing company, can represent ownership in a corporation along with being a debt instrument of the company. Companies typically issue common stock to raise proceeds to expand, pay down or pay off debt. When a company 'goes public,' those proceeds are often used also to expand or reduce debt.

Types of Stocks

Common and preferred are two very different types of stock. As we will see, companies issue the two stocks for different reasons. The risk and potential reward to the investor can also be very different.

Common stock represents ownership in a company. By owning part of the company, you share in both the good times and the not-so-good times of the company. A benefit of being an owner includes the receipt of any dividends paid by the company. Also, if the company experiences growth of sales and profits, hypothetically, the dividend and stock price will increase, increasing your investment performance.

In addition, most common stock is classified as 'voting stock,' which allows stockholders to vote for (or against) the board of directors and various shareholder proposals. It is important to note that common stock dividends are never guaranteed, and neither is share price appreciation.

Common stock certificates have historically been issued, like the one for Gerber you're looking at on screen now, but due to progressive technology, most shares are now electronically issued.

Sample Stock Certificate Issued by Gerber Products

Preferred stock typically is a debt instrument of a company. When purchasing preferred stock, think as though you are loaning the company money. When loaning money to a friend, you expect to be paid back with interest. Preferred stock works in a very similar fashion. It may be issued at $25 per share and may trade on the stock market.

However, instead of sharing in the profits through hopefully increasing dividends and share price growth, preferred stock owners (similar to bondholders) receive fixed dividend payments. Some preferred stock may be convertible to common stock, but this depends on the way the preferred stock was issued.

Preferred stock dividends typically must be paid prior to a corporation issuing dividends to common stock holders. As a result, for this risk premium, common stockholders typically experience greater returns than preferred stock holders. It is important to note that past performance of common stocks and preferred stocks is not a guarantee of future performance.

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