When you enter the sphere of trading stocks, I suggest you be certain you harbor a good understanding of stock basics. Notice how everyone talks about stocks or casually discusses how the stock market is doing? Yet oddly, very few of those same people know much about stocks whatsoever. So let’s go over the basics to give you a good foundation.

The most common type of stock is, you guessed, the common stock. In most cases, when people mention stock they are discussing common stocks. A vast majority of issued stock is this type of stock. With common stock, the shares indicate the sharing of ownership of a corporation as well as the sharing of the profits through dividends.

If you’re looking for the biggest long haul payout, common stocks are the way to go. But note that they’re also the most risky of investments. Consider that when a corporation has to go bankrupt and must liquidate, preferred shareholders, bondholders and creditors are paid out long before common stockholders.

The second main kind of stock is the preferred stock. This type of stock enjoys a greater ownership role in the corporation. This doesn’t mean it has the same voting rights, but it usually does provide guaranteed fixed dividends.

You should note that this comprises a major vantage over common shares as common shares features dividends that vary and therefore never are assured. In addition, whereas earlier we observed that common shares were paid off after many other parties, preferred shares are compensated earlier within the event of liquidation. And finally, preferred shares may sometimes be callable This implies the corporation might employ the capability to purchase preferred stock from preferred shareholders at a negotiated high price.

People frequently refer to preferred stocks as debt not equity. It might help to see them as a mix of a bond and a common stock.

So common stocks and preferred stocks are the two primary kinds of stocks. But did you know that these are further oriented with additional classes of stocks in many cases? These extra classes, which are created and defined by the corporation itself, allow corporations to better manage voting rights among its shareholders.

So if you buy a stock of one class you might gain dividends normally but you can’t vote on corporate policy or operation. This is usually done by simply divvying up the votes per share. So one class receives twenty votes per share while another receives a single vote for each share.

While common stock and preferred stock are the two main kinds of stocks, you also have another category altogether: the penny stock. You will see this described as either a penny stock or a micro cap stock. Some people don’t seem to realize this, but the term micro cap stock refers to a company’s market capitalization while the term penny stock refers to the actual stock price.

While many online investors interchange the terms, a micro cap stock involves stock of a company with market capitalization between 250 and 50 million dollars and penny stock involves a stock traded for less than $5. A penny stock is also defined by one last distinction: you trade penny stocks on the Pink Sheets or OTCBB rather than on major security exchanges like the NYSE or NASDAQ.

Regardless of which term you use or how you choose to label them, the market for penny stocks is more likely to be influenced and manipulated through fraud than stocks traded on the NYSE or NASDAQ.