Shares signify ownership in a company; the trading of shares makes up a large part of the stock market. To the outsider, the terminology associated with shares and the financial market may seem like nonsense, but it is actually quite systematic and can be understood with a little study. Understanding the basic types of shares can help a new investor direct his or her portfolio toward the desired outcome. Learning about the different types of shares can also serve as a gateway into understanding the trading market.
Most of the shares traded on the stock market are known as ordinary, or equity shares. These can provide high rewards if the company is profitable, but also can entail high risk. Buying an ordinary share in a company entitles the shareholder to a portion of the profits and voting rights in the company equal to the stake owned. Unlike buying bonds, the money invested in these types of shares is not guaranteed to be returned; if the company folds, the investment may be lost.
Just because a company makes a profit does not always mean that all shareholders make money. For that reason, some people choose to buy preferred shares, which guarantee a fixed amount of profits. Preferred shares receive dividends before ordinary shares, making them somewhat more likely to pay off than equity shares. On the other hand, the dividends paid to ordinary shares are usually fixed at a set amount, meaning that the shareholder may get paid the same amount in a year with skyrocketing profit as he or she would in a moderately profitable years. If a company breaks up or goes bankrupt, a preferred shareholder also has a higher claim to assets than an ordinary shareholder.
Some types of shares are divided by their investment grade. Several grading organizations give market-wide ratings on each company offering shares in a market, in order to help investors choose their investments with more information. Companies with high investment grades are ones that have a reliable history of profits and quality, making them somewhat safer bets. Types of shares that have high investment grades are sometimes called investment grade or blue chip shares.
Lower graded types of shares are sometimes referred to as junk, penny, or speculative shares. Investing in companies with a low rating is extremely risky, but can sometimes pay off. If a company suddenly takes off thanks to a new product or a changing market, shareholders that purchased shares for next to nothing may suddenly find themselves with extremely valuable holdings. Some traders specialize in hunting down speculative shares that may be poised to take off, but be warned: this type of trading is not for the faint of heart.