What are Common Stocks

The newcomer to stock trading can often be confused about the different kinds of shares which can be held in a company.  The two most important kinds of these are common stock, also known as ordinary shares, and preferred stock or preference shares.

Common Stock

The terms “common” or “ordinary” are used to distinguish this kind of shares from what are known as “preferred” or “preference” shares.  Common stocks are also sometimes referred to as voting shares because common stock holders are usually able to have an influence on the activity of the company through voting.

The most basic difference between common stock and preferred stock is that, should the company go into bankruptcy, preferred stock holders, along with creditors and holders of bonds in the company, will be paid out before the common stock holders.  In this sense, common stock is the least secure form of share in a company.

Of course there’s a flip side to everything and the flip side to the greater insecurity of common stock is that these stocks usually perform better than preferred and other forms of stock.  So while stockholders will be at the end of the line for any payout should the company be wound up, they’re in the front row when the company is doing well.

Common stock holders may also be the most vulnerable to any manipulation by unscrupulous company directors.  Because they have no fixed dividend, their annual return on their investment will be subject to the company’s earnings in any year and what proportion of profits will be paid as dividends, reinvested in the company or otherwise disposed of.

When a company issues additional stock to raise capital, the value of each original share may be diluted.  Because of this some common stock includes what are known as pre-emptive rights.  This means that, in the event of a new stock issue, the common stock holder is able to retain the same proportion of ownership.

Rights of the Common Stock Holder

Holders of common stock have the right to receive dividends, when declared by the company board, and an unlimited right to sell stocks at a profit, known as a capital gain, both on licensed stock exchanges and in private transactions, whenever a buyer is available.

Common stocks also carry the right to a proportion of any capital acquired in the case of a company merger or other major transaction.  Like dividends, this must be approved by the company shareholders.  They are also entitled to a share of any realization of assets in the case of the company being liquidated.

Common stock holders also have the right to vote on the election of directors and on other major decisions such as amendments to the company regulations, mergers and sales of assets.

Tips for New Day Traders

It used to be that day trading was the domain of investment bankers and other financial professionals. Such investing was typically viewed as too risky for inexperienced investors, especially if they ventured into it simply to make a quick profit. But thanks to the information age, day stock trading software, and lots of online help, day trading is becoming more and more inviting to amateurs. Although it’s rare, more than one amateur has learned the art so well it has become a full-time occupation.

If you’re new to the day trading experience there are definitely some things you should and should not do. We’ve listed below some of the most important tips gleaned from dozens of different day trading resources. While our list is by no means conclusive, it is a good start. Before you liquidate all your assets and jump into day trading, we suggest you study, study, and study some more.

Set Clear Limits

Day trading can be an emotional experience, especially for the novice. It is important to set limits before you ever begin looking at investments. These limits will help you control your day trading activity as long as you strictly adhere to them.

But if you allow emotion to get in the way, and you regularly exceed your limits, you could be one of those day traders whose careers ends up being cut short.

There are basically three limits you’re after: maximum purchase price, minimum sale price, and exit price. The maximum purchase price is pretty easy to adhere to; the minimum sale price and the exit price, not so much. The exit price is ideally what you’d like to sell your investments for at the end of the day. However, if a particular investment does not go as well as you planned, you have to have a backup price which is the minimum amount you’re willing to sell for. These three minimums will largely control how you use your resources to reap profits.

Track Your Progress

To be successful at anything you need to know how you’ve done in the past – in order to make adjustments for the future. Without proper tracking of your investments you’ll never be able to get beyond trading by instinct. So make sure you keep track of every investment and all the parameters surrounding it: when you purchased, how much you purchased, sale and purchase price, etc. If you’re looking to buy day trader software you might consider a package that automatically tracks your investments and gives you strategic tips for future transactions.

Avoid Margin Trading

Although there are plenty of other tips we could give you, among the most important is that you avoid margin trading. In layman’s terms, margin trading allows you to borrow money from your brokerage in order to invest in amounts larger than your current portfolio. This is a dangerous practice for all but the most successful day traders because it can quickly wipe out everything you own and put you in large-scale debt. In fact, margin trading is what nearly wiped out the market back in the 1990s. Even the great stock market crash of 1929 was predicated on practices similar to margin trading. So don’t do it or at least try opening a forex demo account and practicing there.

At the end of the day successful day trading is a combination of knowledge, skill, and art. The best day traders can earn more than a comfortable living after gaining sufficient experience. Those who can’t make a full-time living can still use day trading to their advantage, building a comfortable nest egg with which to retire.