The stocks themselves get a little more complicated than the paint job scenario just mentioned. There are different kinds of stock, and they are differentiated by some very fine print. While all stocks represent ownership of shares of a company, they aren't all alike. A stock can be an actual document or a virtual notation on someone's computer. Here is a list of stock categories:

Blue Chip Stock - A share of one of the most established and financially secure companies in the country.

Secondary Stock - A share of a company with substantial backing that is not quite considered blue chip.

Income Stock - A stock that is usually characterized by its issuing company's focus on providing higher dividends.

Growth Stock - The stock of a company that is still small but is believed by its shareholders to have great growth potential.

Penny Stock - A highly speculative stock in a company with little or no real value other than its uncertain growth potential.

The Two Main Issues of Stock

In addition to the unofficial kinds of stocks just discussed, the market has two issues of stock to accommodate different types of investors: common stock and preferred stock. As a very general rule, the benefits of common stock tend to be more geared for individual investors while those of preferred stock tend to be more geared to the needs of institutional investors such as pension funds, mutual funds, and banks.

Common Stock

Aptly named, common stock is the one most people think of when they hear the word stock. It's also the kind of stock most widely bought and sold, or in investor lingo-traded. It represents basic ownership of part of a company, as was described in the beginning of this lesson. The owner of one share of common stock gets one vote, or one proxy, on company matters. As stated earlier, two shares equals two votes and so on.

When the value of the company goes up as it did in the example of the apple crop freeze, share owners make money because the value of the company has increased and subsequently the stock has gone up also. This is called capital gain.

When discussing types of investments, you will often hear terms such as financial "instruments" and "vehicles." These terms are not "financial terms" which imply anything significant but simply words which are used interchangeably instead of less professional sounding terms such as "things" or "stuff."

If you had bought stock in one of those companies that makes Widgets from apples, the value of your company and subsequently its stock would have decreased because of the deep freeze that destroyed the apple crop. You would have suffered what's called a capital loss.

Capital gains and losses are one of the two ways stock make and lose money (the other being dividends). In addition, however, other factors such as the taxes on capital gains should always be taken into consideration. Current capital gains taxes are so high as to often negate much of a stock's potential earnings and make many stocks unattractive to investors for that reason. As with any investment, you always run the risk of losing the initial money you invested (capital loss). While in such a case it would offer little if any consolation, you would, at least, receive a tax credit for the money you lost.

When the Widget company makes money by selling all those Widgets, the owners of the stock get a proportional cut of the profits in the form of a dividend. The investor has the choice to take the dividend as a payment after paying taxes on the profit, or reinvesting it to buy more stock. Dividends are related to capital gains in that any company which is consistently making profits and paying them out in dividends will soon be discovered as a great company. For that reason, the value of the company would eventually rise and create a capital gain for its owner when he or she sells the stock.

Preferred Stock

Preferred stock is different from common stock in that preferred stock owners get their dividend payments before the common stock owners. Also, should the company go out of business, preferred stock owners get paid their share of whatever's left before the owners of common stock get paid.

So why isn't everyone buying preferred stock? First, companies don't issue preferred stock until after common stock has been issued, so there's less of it. Second, preferred stock owners don't generally get proxy rights. Third and most important, preferred stock owners usually get paid a preset dividend regardless of how much money the company makes.

Further confusing things, companies can issue any number of different preferred stocks, or classes. Usually, the different kinds are labeled A, B, C, etc., and each class can have a different price or dividend. These classes are highly flexible regarding their similarities and/or differences to each other. This flexibility is necessary to accommodate the tvpx ars inc circumstances of the issuing company at the time. For that reason, it would be difficult if not impossible to provide a complete listing of preferred stock classes anywhere. As always, the responsibility of discovering the nuances of each class is left up to the investor.