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Types Of
Stocks
What types of stocks are there?
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Ordinary Stocks
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When purchasing an ordinary stock, you own a share of the company. This entitles you to receive
profits from the operations of the company in the form of dividends. At the annual general meeting
(also referred to as an AGM), you have voting rights. Ordinary stocks are what you will start to
trade in and most traders never venture beyond this.
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There are, however, other types of securities and these are:
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Preferential Stocks
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A preference stock is different from an ordinary stock. Preference stockholders receive
dividends before dividends on ordinary stocks are announced. If the company is wound up, preference
stockholders rank above ordinary stockholders in the distribution of assets. Preference stocks can
often have a fixed dividend rate. |
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Bonus Issue
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This is a free issue of stocks to the stockholders based on the number of stocks already
owned. |
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Rights Issue
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A rights issue can be granted to stockholders to buy stocks in the company, often below market
price. |
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Derivatives
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There are also securities you can trade on the market that derive their price from the parent
stocks. There are two types - Options and Warrants - and these are collectively known as
Derivatives.
There are two parties involved in an options contract, the writer or seller and the taker or
buyer. The writer writes the option and has the obligation of accepting or delivering the stocks.
The takers have the right, but not the obligation, to buy or sell the stocks.
There are many advantages of options trading, the least of which is leverage. An option can be
bought and sold for a fraction of the stock price, giving an effective higher return (or loss) on
investment for a stock price move. |
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Warrants
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Warrants, like options, derive their price from the parent security. Warrants though are issued
by banks and other financial institutions and are classified based on whether they have an
investment or trading purpose.
Warrants may be issued over securities, a portfolio of securities, a stock price index, currency
or commodities.
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