As you delve into the world of online stock trading, you should make sure you have a strong grasp on the basics. For example, everyone hears terms like stocks and stock trading all the time. But you would be surprised how many people don’t actually understand stocks at all. With this article I’ll get you started with a discussion of the different types of stocks.

Common stock is the most common kind of stock, and that isn’t a pun. Whether they realize it or not, when people discuss stock, they are most often deliberating common stock. Most issued stocks are this kind of stock. Through common stock, shares provide shared ownership and shared profits in dividends.

Capital growth makes common stock the best earner in the long term. Yet this comes at the expense of greater risk than most investments. Just as a sample, what do you think happens when a company must liquidate after going bankrupt? Common shareholders will not obtain their payout until after creditors, preferred shareholders and bondholders.

Another closely related type of stock is the preferred stock. Preferred stock indicates a kind of ownership in the corporation yet doesn’t, in most cases, include the same voting rights. However, preferred shareholders in most cases enjoy a fixed dividend guarantee.

Note that this is a significant advantage over common stock because common stock features dividends which vary and thus never are guaranteed. Additionally, whereas earlier we mentioned that common stock shareholders were paid after several other parties, preferred stockholders are paid off earlier in the case of liquidation. And lastly, preferred stock can on occasion be callable, which means the corporation may exercise the option to buy preferred shares from preferred shareholders for a premium.

It is worth noting that many individuals view preferred stock as debt rather than equity. One might categorize them as something between a common share and a bond.

While preferred and common are the primary types of stock, corporations can create separate classes of stock for separate purposes. The obvious reason for this classification system is so that the corporation can control voting rights, giving votes to one class of stocks and not the other.

So even among preferred stocks, you might have two separate classes of stocks, one which provides several votes per stock and another which provides only a single voter for every share of stock.

While common stock and preferred stock are the two main kinds of stocks, you also have another category altogether: the penny stock. You will see this described as either a penny stock or a micro cap stock. Some people don’t seem to realize this, but the term micro cap stock refers to a company’s market capitalization while the term penny stock refers to the actual stock price.

While many online investors interchange the terms, a micro cap stock involves stock of a company with market capitalization between 250 and 50 million dollars and penny stock involves a stock traded for less than $5. A penny stock is also defined by one last distinction: you trade penny stocks on the Pink Sheets or OTCBB rather than on major security exchanges like the NYSE or NASDAQ.

The bottom line with penny stocks is that they’re just plain more risky, so keep that in mind when you start delving into their world.