If you are planning to invest in the stock market, it’s worthwhile to do a bit of homework first. The market has its own vocabulary and jargon, and familiarizing yourself with these will help you to follow the ups and downs of trading. There are a number of terms which clarify different types of stock shares. Here is a list of the most important ones.
Common stock – Most of the stock which is held by the public is common stock. Although holders of common stock are considered part owners of the company and have voting rights proportionate to the number of shares that they own, due to limited liability they are not personally responsible for the business’s debts. Common stock holders have the right to share in any dividends the company may pay out. These shares are highly liquid and can be bought or sold readily.
Preferred stock – Publicly owned companies may also issue preferred stock as well as common stock. Preferred stock holders do not have the right to vote. However, there is a financial advantage in that dividends are generally paid out consistently on preferred stocks and preferred stock holders receive dividends before holders of common stock do.
Authorized shares – Authorized shares are the total number of shares that a company was authorized to issue when it was first established as a publicly held body. This number may be increased only by a majority vote of the stock holders.
Unissued shares – A certain number of the authorized shares may be retained by the issuing company as part of its treasury. These are not issued to the public at large. Doing so will help the company to avoid a hostile takeover by another company which has bought up a large amount of stock. The shares may also be used in the future to fund major purchases.
Restricted shares – A certain amount of stock may be given to company employees (“insiders”) as compensation and incentives. It is termed restricted because in order to sell, holders of these shares must receive permission from the Securities Exchange Commission. Beginning stock market traders would be well advised to observe what owners of restricted shares do; if they start selling large amounts, it could signal trouble.
Float shares – The stock which is freely available for trading on the open market is called float shares. These may be bought by any individual or company.
Outstanding shares – All the shares which are issued by a company – that is, the total of float shares and restricted shares – are termed outstanding shares.