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Common, preferred, class a, class B, how to choose

  • The main types of actions are common and preferred, each having advantages and disadvantages.
  • Common stocks generally carry voting rights, while preferred stocks guarantee dividends.
  • Stocks are also categorized based on characteristics such as industry, market value, growth potential, and volatility.
  • Visit Insider’s Investment Reference Library for more stories.

When researching stocks, you will often come across descriptions such as “common” and “preferred”, as well as “Class A” and “Class B”. The type you decide to invest in will depend on your financial goals. While each stock represents a portion of a company’s ownership, there are key distinctions you should know before deciding which type to add to your portfolio.

What are the two main types of actions?

Actions are divided into two broad categories: common and preferred.

Most people own common stock, which gives shareholders ownership of the company as well as the right to vote, in most cases. Holders of common stock will also receive dividends if the company pays them, although they are not guaranteed and the amount may fluctuate.

Preferred stocks are more of a way to earn income in the form of dividends. “A preferred stock is a bit like a hybrid between a bond, which is a form of debt, and stocks, which is a form of property,” says Zach Weiss, research analyst for FBB Capital Partners. Generally, shareholders of preferred shares will receive guaranteed fixed dividends.

Additionally, if a company goes bankrupt or liquidates its assets, preferred shareholders are paid before common stock holders. Thus, preferred stocks tend to be less volatile than common stocks.

For some preferred shares, the company may require shareholders to resell them if the dividends become too high relative to the market. Companies set the redemption price, or purchase price, in the prospectus, and shareholders must sell for that amount.

Advantages and disadvantages of common and preferred shares

Common and preferred stocks both have their pros and cons, and which one you choose depends on your investment strategy. Here are some of the main advantages and disadvantages of each:

Class A shares versus class B shares

Shares can be subdivided into classes, usually class A and class B. Both have the same right to profit from a business. The main difference is in the voting rights.

Voting rights can be structured in different ways. In some companies, one class (generally class A) has more voting rights than the other. In other cases, a class owns all the voting rights of the company. In these cases, the founders of the company can own all the shares with voting rights, guaranteeing their power.

Shareholders in the non-voting class “are there to accompany the race and whatever the decision of the Class A shares,” said Sam Brownell, managing director of Stratus Wealth Advisors in Kensington, Maryland. “They have to be willing to take the risk of having no control over the direction.”

Other companies designate certain votes for Class A only, such as filling the board of directors or changing the strategic direction of the company. All classes could vote on other important decisions, such as dissolving the company or considering a merger.

Meta Platforms (formerly Facebook) is an example of a company using share classes to consolidate its voting power. Meta has Class A and Class B shares, but Class B shareholders hold more voting rights – at the rate of ten to one per share. Founder Mark Zuckerberg and a few insiders retain control of the company through their Class B shares, while Class A is primarily used to raise capital. Zuckerberg owns nearly 90% of Meta’s class B shares.

Brownell says it was clear Zuckerburg wanted a lot of control from the start, but this setup has its downsides. “Facebook has shown that there can be leadership and transparency issues when you, as a founding member, are accountable to no one but yourself when making decisions.”

Other ways of describing actions

Stocks are analyzed and discussed in many other ways beyond the main approaches used to analyze company stocks.

Some of the most common are:

  • Small cap vs large cap. Based on the total market value of a company’s shares. Typically, small caps are generally considered to be those with stocks worth less than $ 2 billion and large caps are those worth more than $ 10 billion.
  • Growth vs value. Growth stocks have gained in value over time, while value stocks come from struggling or underperforming companies that are priced below their face value.
  • Defensive vs cyclical. Defensive stocks generally hold up during an economic downturn, as they belong to sectors with continuous demand, such as healthcare and utilities. Cyclical stocks tend to fluctuate with the economy due to changes in consumer spending.
  • Dividend vs non-dividend. Dividend stocks provide payments to shareholders when the company has additional cash, unlike stocks without dividends. Stocks without dividends may have a higher share price and provide better returns to investors, but they carry more risk.
  • Industry or sector. The Global Industrial Classification Standard aggregates stocks of companies from similar industries and defines 11 main market sectors for easy comparison. Energy, utilities, healthcare and real estate are several examples of stock market sectors.

The financial report

Before developing an investment strategy, you need to assess your risk tolerance and goals. If you’re about to retire and hope to earn some income, dividends from preferred stocks can give you a reliable source of cash, but not a lot of growth potential. On the other hand, if you have a lot of years left to invest in the market, common stocks may provide higher returns.

When it comes to which companies to invest in, Weiss also recommends investing with management teams who own a portion of the business. “Maybe the founder of the company still runs it,” says Weiss. “Usually when the insiders have a lot of skin in the game, as a shareholder you know if I get burned, you get burned.”