Types of Stocks

Income Stock A stock that pays regular, often increasing dividends The ideal income stock would have a very low volatility (as the Beta would measure), a dividend yield higher than prevailing 10-year treasury bond rates, and a modest level of annual profit growth. Ideal income stocks would also show a history of increasing dividends on a regular basis so as to keep up with inflation, which eats away at future cash payments.

Growth Stock A growth stock is a share in a company whose earnings are expected to grow at an above-average rate relative to the market. A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Growth investors choose stocks based on the potential for capital gains, not dividend income, so they can be risky.

Common Stock Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure; in the event of liquidation, when a company has to sell off all of its assets (likely due to bankruptcy), common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders are paid in full.

Preferred Stock Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. If a company is struggling and has to suspend its dividend, or preferred shareholders may have the right to receive payment before the dividend can be resumed for common shareholders. Preferred shareholders have prior claim on a company's assets if it is liquidated, (if it goes backrupt and has to sell off all of its assets) though they remain subordinate to bondholders.

Common Stock vs Preferred Stock