Types Of Stocks and How They Trade

Photo by Lito C. Uyan

This is the second of a series of posts about the stock market. 

In my first post, I talked about the basic definition of the stock and how you can get in. Now I'll be talking about the two main kinds of stock and where you can trade them.

There are two main types of stock: the common stock and the preferred stock.

Common stocks are the stocks that most people are referring to when they talk about it. Majority of the stocks are issued in this form and it is the stock that you're buying in your online brokerage account. The features of this stock are what was discussed in the first series (see Basic Introduction To The Stock Market).

Preferred stocks are stocks that represent some degree of ownership in a company but doesn't have the same voting rights that the common stock have (varies depending on the company). The good thing about preferred stocks is that dividends are usually fixed and guaranteed forever (dividend in common stocks are never guaranteed). Preferred shareholders are also paid off before common shareholders in case of liquidation, when the company goes bankrupt (but they are still paid after debt holders). Preferred stocks can also be bought back by companies from shareholders at anytime for any reason (usually for a premium of course).

These two are the main form of stocks. Of course other companies have the option of customizing the different classes of stocks that they issue. This is done by companies who want to give voting power to certain group of people.

Now that you know the two main types of stocks, let's proceed to how do we trade them.

In my first post of the series, I mentioned that you can buy stocks through an online brokerage. Now these brokerage are just medium for you to buy and sell stocks. Stocks are bought and sold on exchanges. Exchanges are the market where buyers and sellers meet and decide on the price of the stock. It's like a market place where stock brokers gather to buy and sell stocks at an agreed upon price with other stock brokers. 

Before this is done physically, where stock brokers gather in the stock exchange and starts yelling and signaling each other buy or sell when they hear or see the preferred price of a stock that they want to buy or sell. But with the advancement in technology, this is now done online.

The purpose of the stock market is to facilitate the exchange of stocks between buyers and sellers, thus reducing the risk of investing. Now there are two market when it comes to stocks, the primary market and the secondary market.

The primary market is where stocks are created, by means of an Initial Public Offering (IPO). This is where companies first sell their stock to the public. The secondary market is where stocks that have been previously issued are traded without the involvement of the issuing company. This is the one that people refer to as the stock market.

The name of the exchange in the Philippines is the Philippine Stock Exchange (PSE). The PSE is the one who facilitates all of the stock trades done in the Philippines (it was formed in 1963 when the Makati Stock Exchange and the Manila Stock Exchange were combined).

Next I'll be discussing about the two ways people make money in the stock market.

Source: Investopedia, PSE