When you decide you're finally ready to start investing in the stock market, you'll quickly find that you're surrounded by options that you have never heard of before. There are stocks, both common and preferred, bonds, ETF's, ETGSHYULEDNE (okay I made this last one up...) and other investment options that are open for purchase. Let's list them out one by one so that you know what you're getting into.
Common Stock:
A common stock is what most people are used to hearing about when someone says they bought stock in a company. A common share of a stock is simply that, a share of a company that issued a stock. It represents a piece of that company that was sold to generate capital (cash) for that company to do whatever it needed more money for that it didn't currently have at the time. Holders of this type of investment have the benefit of an elected board of directors that helps to control movement of the common via a voting system so that you don't need to be bothered by it if you don't want to be. Unfortunately, as a common stock holder however, you are second to other types of investors who have spent more money or more specific interest in the company such as preferred stock shareholders, bond holders, or other debt holders. If the company goes bottom up, the others will be paid first before you ever see a dime as a common shareholder.
Preferred Stock:
In comparison, preferred stockholders are those who hold a more specific type of holding of that company. They usually pay more than common stock holders for their piece of the company for more rights. These rights include being paid before common shareholders when a dividend is issued and a more specific right to vote on company happenings. Most common shareholders will not get this right and will have to rely on the board to vote on their behalf.
Bonds:
Imagine you've just taken out a car loan because you needed a new set of wheels. The person you took that loan from is giving you a loan or in other words, a bond. When you buy a bond, you're dong the opposite of what you did with your car. This time you are giving a loan out to a company that promises to repay you for your money and also pay you an amount of interest. Usually the interest is really low on most but you can get some pretty risky bonds that pay high amounts because they may be issued on behalf of a start up company that has little to no credit. Generally bonds are a type of investment that are reserved to those who wish to avoid the higher risk of playing with stocks.
Mutual Fund:
If you really don't want to bother with searching through endless amounts of companies to find those that you wish to own a piece of, you can always pay someone else to do it for you. That's basically what a mutual fund is. It's a collection of stocks and bonds that has been put into a portfolio that people can invest in to further grow the amount of stocks and bonds within it. By investing in a mutual fund, you diversify your investment in a lot of companies that someone else has chosen for you instead of picking your own. This is generally what most new investors use because they don't want to spend the time trying to learn the trade of stock analysis. The problem is that you have to pay fees to most/if not all mutual funds for that person or company to run the mutual fund that you're paying into.
Now you have a working knowledge of the most common types of investment options. This does not include other avenues such as futures, real estate, or others but the ones I've already listed are what I feel are most important to know about because I deal primarily in dividend growth investing as a primary means of generating more cash for the portfolio to grow.
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