Types of Stock Investment Bankers Should Know - dummies

Types of Stock Investment Bankers Should Know

By Matt Krantz, Robert R. Johnson

Stock comes in all shapes and sizes. Companies and their investment bankers have great latitude in deciding what rights they bestow on the ownership they sell to shareholders. Stock offerings can be customized in various ways, but typically there are three main types of stock to be aware of:

  • Common stock: If you buy 100 shares of Walt Disney stock, you’re most likely buying the common stock. The shares of common stock are the typical shares being sold by the company. Common stock, at most companies, accounts for a vast majority of the shares outstanding.

  • Preferred stock: Sometimes to encourage investors to become owners of a company, there’s a bit more inducing required. Preferred stock is a unique type of stock that attempts to give shareholders a more bond-like experience. Preferred stock typically pays a higher dividend yield than what’s being paid on the common shares.

    That’s attractive to investors who may normally steer clear of stock and instead go for bonds. Preferred stock dividends, though, can be halted like common stock. But if a company halts preferred stock dividends, shareholders must be made whole with the lapsed dividends before there can be a dividend paid on common shares.

    Preferred stock can also be callable, meaning the company can at any time buy the shares from investors at a pre–agreed-upon price. But, don’t get seduced by the name — preferred stock really isn’t better for investors if the company is wildly successful. Preferred stockholders don’t share in the upside like common stockholders do.

  • Stock options: Options are financial instruments that give their owners the right to buy or sell a stock at a pre-set price sometime in the future. Options can be used by speculators who want to bet that a stock price will rise or fall in the future. Options come in different varieties, including puts, which give owners the right to sell, and calls, which give the right to buy.

    Options can also be granted to company executives as a form of incentive pay. Warrants are types of long-term options that are issued by the company itself, rather than standard options that are issued by exchanges like the Chicago Board Options Exchange. Options are complex tools.