How are the shares classified?

If you are new to investing, the details can seem complicated. But once everything is classified, it becomes a lot easier. You may have heard that shares are known as stocks or securities. The reason they are called stocks is that you buy an equity or ownership interest in a company. Shares are also called securities for the same reason, as a part of the ownership in the company is secured.

When you buy stocks, you become a co-owner of the company, perhaps only a very small part of it, but one owner. 

So make sure you’ve done a lot of research on the company if you plan to invest in its stocks. A company’s prospects are not always as good as they are trying to make out. Take as much detailed look at your financial situation as possible and your prospects for the future.

We may also use the word “stocks” as a broader categorization of two specific types of stocks in which you can invest: preferred stocks and common stocks. Each one brings its own unique pros and cons, and not all companies offer both of them. 

Regardless of the type of shares, buying them makes you a co-owner or shareholder of a company.

Common shares and preferred shares

The differences between common and preferred shares are related to the rights and privileges that an investor has when he is a shareholder of a company. We’ll talk about the most important differences. 

The preferred share is a share that confers on its holder an extra privilege, generally of an economic nature, with respect to what is generally known as a common share. For example, the holder of a preferred share has a higher hierarchy in the collection of dividends or in the distribution of the remaining equity in the event of bankruptcy by the company. Preferred shares do not give their holder the right to vote at ordinary or extraordinary shareholders’ meetings, nor do they assign any participation in the capital of the company.

If there are assets in liquidation, the collection hierarchy is better for the preferred shareholder than for the common shareholder. In addition, the preferred shareholder may have other privileges such as access to new shares at a discounted price with respect to the market price or the nominal price, or other rights derived from holding preferred shares.

The liability of the common shareholder is always limited, however, that of the preferred shareholder may not always be so under certain conditions. Generally, the preferred shareholder is more closely linked to company policy and long-term performance. Meanwhile, the common shareholder seeks to obtain profitability in the short or medium term and tries to speculate on the value of the share. Therefore, in many cases, they are not shareholders who identify with the company’s policy since what they seek is to speculate with the future valuation of the company. They enter and leave it according to market conditions or there are news regarding the value, such as OPAs, IPOs, capital increases, splits.

Common and preferred shares have always existed and are a way of giving value and importance to the company. These differences allow the creation of financial models adapted to different investment profiles of its shareholders, rewarding those who believe in the future value of the company and its policy or business model.

Other types 

When a company issues shares, it is also frequent to see that the common shares are divided into Class A and Class B. But then what is the difference? 

A company can issue different shares to secure some votes at the shareholders’ meeting. For example, Class A shares grant a right of 10 votes per share, and Class B shares only one vote per share. This way, the company ensures that a group of shareholders maintains a majority of votes in the meeting.

Voting rights aside, different classes of common stock almost always have the same equity interest in a company. Therefore, shareholders of all classes have equal rights to share in the profits of the company.