The Two Main Issues of Stock

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 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.

The 30-Second Recap

• A stock represents a proportional ownership of a company.

• Stocks make money when the company makes a profit and splits it among the stockholders (known as a dividend) or when the actual value of the company goes up (known as a capital gain).

• Valuing a company is the sum of its assets and liabilities; this is also known as its net worth.

• Stocks are split into two issues ”common stock that appeals more to individual investors; and the various classes of preferred stock that are geared more to the needs of institutional investors.

• Various terms have arisen to describe the different behaviors of stock including blue chip, secondary, income, growth, and penny stocks.