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Dividend Investing 101 – The Difference Between Common Stocks and Preferred Stocks

Stock is the shares in which ownership of a company is divided into many shares. In American English, the stocks are collectively referred to as “stock”. A single share of any of the stock is in common proportion to the number of outstanding shares. The number of shares and the exercise price thereof are usually stated on the notice board at the company’s office. Normally, a company issues new stock from among its existing stock or from the stock accumulated under its existing capital stock.

There are two types of stocks in American English: common stock and preferred stock. Common stockholders are entitled to dividends and common stock shareholders are entitled to receive dividends only after a specified period. In general, preferred stock is the most preferred kind of stock and is listed below the common stock. The dividends are paid by the issuing company out of its retained earnings or from the profits reserved for the payment of dividends.

Dividends are paid to the shareholders every month. The dividends are given in kind, usually in cash. When a company makes money or sells some of its assets, it issues new stock and pays out dividends to its common stockholders. In order to maintain the fractional shares, it may be necessary to issue additional stock periodically. This is known as an “outlay”.

As soon as a corporation determines that it wants to sell part of its holdings to pay for certain expenses, it issues up to half of its shares as open stock. The selling of these shares is called an “outward tender”. The other part of the issue may be retained by the corporation for the development of new products or for the payment of debts. Once the surplus is used, it can be made available to the public through stock sales or through an IPO ( IPO is also a synonym for an Initial Public Offering). All such requirements have one objective: to raise funds.

Most stock markets across the world operate using a quotation system that allows buyers and sellers to place bids on the stocks of each other. The bids are done in the same manner as any auction sale. After a seller has won a bid, he must either choose to accept the sale and release his security, or else he can continue the bidding. If the seller chose to keep his security, then the buyer will also need to either drop his bid or walk away. Similarly, if the buyer won a bid, then the offer is either accepted or rejected.

The two main types of stocks are common stock and preferred stock. A common stock is a stock owned by the company and traded on a market like the New York Stock Exchange (NYSE). A preferred stock is a stock held by the shareholder but not publicly traded. The dividend rate on common stock is generally double that of preferred stocks. This dividend rate reflects the financial strength of the company, as well as its potential for appreciation.