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For beginners, trading individual stocks on the stock market can be a scary venture. One common question Im asked is, How do I know which stocks to invest in?

But even before figuring that out, there are important questions to ask yourself, such as: Do you want to purchase common stock or preferred stock? Do you want to purchase certain classes of stock? Those questions can be more easily addressed once you have the information you need about them.

First, lets examine preferred stock. The primary reason individuals consider purchasing preferred stock is because the owners of preferred stock are higher in the pecking order than common stock owners. Preferred stock owners always receive their dividends before common stock owners, even in the event of a company going bankrupt. Preferred stock owners also receive a fixed dividend payment. If a dividend payment fluctuates, common stock owners receive the new amount. Preferred stock owners do not have any voting rights, but in some cases are able to convert their shares into common stock.

Then theres common stock. The primary reason individuals consider buying common stock is because they essentially become part owners of the company theyre investing in. Common stock owners are given voting power within an organization. Generally, the more shares you own, the stronger your vote is. You can vote on organizational changes as the company puts them out.

Determining the difference between common stock and preferred stock is a necessity in order to understand classes of stock. Stock classes exist almost exclusively with common stock. There are usually two or three different stock classes with each common stock.

Class A stock is primarily the shares of common stock that the individual person can buy, sell or hold at their leisure. These stock shares often represent one vote per share. This means the more shares you own, the stronger your vote. When dealing with the buying and selling of stocks, this stock class is the one most commonly traded.

Class B stock is not traded publicly in the marketplace. These stock shares are often held by company insiders who have or currently work for/within the company. These shares can be sold off, just like Class A stock would be sold, but it becomes common knowledge to the public when insiders buy or sell stock. These shares often hold more voting rights than that of Class A stockholders. In the case of Google (GOOG) the voting rights of Class B stock vs. Class A stock is 10 to 1.

Class C stock is similar to Class A stock in that it is publicly traded, but doesnt allow its stockholders to have voting rights. Because of this, Class C stock can be viewed as less of a value than Class A stock. For example, Googles Class A stock has a higher cost per share than Googles Class C stock. Other companies that offer both Class A and Class C stock include Facebook (FB), LinkedIn (LNKD) and Yelp (YELP).

Many view preferred stock as better than common stock. Weighing voting rights vs. being paid first is a hard debate. Having a strong role in a company is usually the only way to secure Class B stock, so most would prefer Class A stock to Class C stock.

Overall the strength of an individual company should be considered before investing into a company and its stock. Understanding what each stock class can bring you is a way to determine the direction youd like to go.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Matt Marino

Nasdaq

Matt Marino is a certified New Jersey business and computer teacher. Matt holds a BA from Stockton University, a MBA from Georgian Court University and an MeD from Bowling Green State University. Matt is the CEO and Owner of FIBE, a Point Pleasant based web design and media company. Matt is the founder of Education-Articles.com. Matt discusses topics that are commonly expressed as areas of importance within personal finance, such as investing and retirement. The information provided is intended to be informative in nature and not suggestive in any way.

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