The Difference Between Ordinary Stocks And Preference Stocks
Johannesburg (Sunburst Africa)–Some analyst call the world of investing a jungle with animals such as Lions (stocks), tigers (bonds) and bears (cash). While these are the three main classifications of investment vehicles, the focus of this article will be on stocks.
Stockscould be referred to as equities or securities. This is so because, a purchase of a stock is a purchase of an equity, or ownership, share of a company. When you own a stock, you secure a share of ownership in a company and thus stocks are also called securities. Owning a stock makes you a part owner of a company.
The stock market is however made up of great stocks and non-performing stocks, terrifically run businesses and poorly run businesses. This article is focused on making you know more about great and poor stocks and to invest better. Irrespective of the size of your ownership in a company-you are a part owner once you buy stocks of the company.
Which Type of Stock Should You Select?
Stocks are composed of two main types- preference stocks and ordinary stocks? The next question that comes to your mind would be- what is the difference? Being a part owner doesn’t depend on the type of stock you buy.
Preference stocks offer investors two options: a more aggressive investment (stocks) and a more conservative one (bonds). This combination makes the price of preference stocks less flexible compared to ordinary stocks. There stocks therefore attract many risk averse investors.
Second advantage of preference stocks is that it almost always pays dividend to its shareholders.
Thirdly, dividend are paid to preference stock holders before ordinary stock holders.
However, dividend van be accumulated when management of a company decides freeze it due to financial constraints
In instances of the company going bankrupt, preference stockholders have a claim to any assets before ordinary stockholders.
However, preference stockholders don’t have any voting rights. Though, this doesn’t really matterto many investors, investors who would like to have a say in the management of the company should therefore go for ordinary stocks.
Ordinary stock, which is sold by most companies, is the only “pure” form of stock in the market. It’s what people are talking about when they just mention “stocks.” Because ordinary stock has the potential for greater returns, investors buy it more often than they do preference stock.
Ordinary stock represents an equity ownership in the company and entitles shareholders the right to vote on management issues at the annual shareholder’s meeting.
Ordinary stockholders may, or may not, receive dividends, depending on management’s decision about distributing profits.
Many beginning investors believe that preferred stock is better than ordinary stock, but that’s not necessarily the case. Your decision to purchase one over the other depends upon your financial goals, your tolerance for risk, and your interest in voting rights in the company.
Because most investors are interested in price appreciation, they usually purchase ordinary stock. You get more “bang for your buck.” It’s that simple — and so is our goal for you: to get the returns you need to fund your dreams. That’s the reason for this article
So, from this point on, whenever we refer to “stock,” we mean ordinary stock. A little later, we’ll begin to learn about specific kinds of stocks that are best for you, such as growth-producing or income-producing.
Right now, though, you’re ready to step a little further along the trail.
How Do You Make Money Investing in Stock?
There are two ways to earn money when you invest in stock: price appreciation and dividends.
If the company you invest in does well and makes money, its stock becomes attractive to own, and soon more investors will want to own some of the company that you own. That’s when supply and demand works in your favour. The greater the demand, the more the price is driven up. The price moving up (because more people are buying the stock) is known as price appreciation — your stock increases in value. You’ll realize a profit, or gain, when you sell stock that has appreciated.
Say you buy stock for R100 a share, and it grows, or appreciates, to R150. Smart you! You earned R50, and the value of your share of stock increased, or appreciated, by 50%. The flip side of that is price depreciation, which is another way of saying that the price of a stock went down.
In addition to the potential price appreciation, or attractiveness, of your stock in the public’s eye, you can also earn a dividend when you own stock.
Distributing dividend payments is another way for a company to share its profit with you. This means that each quarter the company pays you a certain amount of money for each share of stock you own. Usually dividend payments are much smaller than the price of the stock. For example, a company whose stock price is R150 per share might pay a dividend of 40 cents per share each quarter.
Many times, dividends come at the expense of greater price appreciation, because the company is distributing its profits to shareholders rather than reinvesting these profits back into the growth of the company. However, companies that pay dividends can be very attractive to investors, because they offer a steady stream of income. Whichever you pick — current income (dividends) or longer-term growth (price appreciation) — as your priority depends on what you need.