Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions.
Over the long term, common stocks, by means of capital growth, yield higher returns than many other investment. However, if a company goes bankrupt and liquidates, the common stock shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Therefore the risk in purchasing common stock is higher than other more conservative investments, such as purchasing bonds. Common stocks may be able to play an important role in your investment strategy.
Preferred stock ownership represent ownership rights in a company, but usually doesn’t come with the same voting rights. (This may vary depending on the company.) Preferred stockholders have a higher claim to dividend payments from the company than common stockholders. Preferred shares are issued based on their par value and a fixed dividend rate at issue. The dividend rate payment may or may not be favorable based on the purchase price of the preferred stock, current interest rates and inflation. This is different than common stock, which has variable dividends that are never guaranteed.
In the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).
Preferred stocks have characteristics of both common stocks and bonds which makes them attractive to some investors.
- Invest in approximately 10 to 20 stocks in at least six to eight sectors with different investment characteristics.
- No more than 20% of the total value of your stock portfolio should be in any one sector.
- No more than 10% of the total value of your stock portfolio should be in any one stock.
Deciding which stocks to invest in can be difficult, especially if you have a low tolerance for risk. That’s why it’s important to define one’s financial goals and how much risk can be tolerated. Research stocks that fit within your strategy and invest in stocks that have the potential to help you meet your specific goals, whether you want investment growth, income, or a combination of the two.
Your Financial Advisor can provide you with a wide range of stock investing services, including:
- Asset allocation strategy development
- Individual stock selection
- Help in deciding when to buy and sell your stocks