What is a stock?
A stock is a security that represents a portion of a company’s share capital. By purchasing stocks, investors become co-owners or shareholders of the company. Depending on the company’s structure, shareholders may receive voting rights at the annual general meeting and may be entitled to a share of the company’s profits in the form of dividends. Many investors buy stocks with the aim of participating in the company’s growth, benefiting from a rising stock price, and building long-term wealth.
Companies issue stocks in order to raise capital. By selling shares to the public, companies obtain equity that can be used for investments, expansion, or other strategic initiatives. This creates a mutually beneficial relationship, since investors have the opportunity to earn returns and the company gains access to funding.
Investors can profit from stocks in two primary ways:
Companies that issue stocks typically take the legal form of a public limited company (AG) or a partnership limited by shares (KGaA). European corporate structures such as Societas Europaea (SE), as well as international forms like the American Inc., British PLC, or the French, Spanish, and Italian SA can also issue stocks. In all cases, a company must be listed on a stock exchange in order to offer its shares to the public.
What types of stocks exist?
There are various types of stocks, and they differ in their rights, transferability, or listing. These include nominal value stocks, dividend stocks, bearer stocks, registered stocks, ordinary stocks, preference stocks, and no-par value stocks. Once you understand the characteristics of each type, you will be better equipped to decide which stocks you can invest in and which ones suit your investment strategy and portfolio.
Nominal value stocks
Nominal value stocks have a fixed monetary value, which is usually one euro per stock. This allows companies to issue a particularly large number of stocks, although this type of stock has become rare.
It is important to note that the nominal value of a stock does not match its market value, which is the stock price. Since the market value is determined by supply and demand, it can differ significantly from the nominal value.
The proportion of a company’s share capital represented by one stock is calculated by comparing its nominal value to the company’s total share capital. This proportion usually accounts for only a small fraction of the overall capital.
There is also a legal restriction to consider. Nominal value stocks cannot be issued below their nominal value, although they may be sold at a higher price. During a capital increase, for example, the nominal value may be lower than the issue price, since the issue price can reflect the current market price.
Dividend stocks
Dividend stocks are stocks that distribute dividends or profits to their shareholders. Whether dividends are paid, and in what amount, is decided at the annual general meeting of the public limited company. Dividend payments are usually made a few days after the AGM and are distributed as a fixed amount per stock.
Small cap
Small caps refer to stocks of smaller publicly listed companies with lower market capitalisation (market cap). There is no universal threshold for what qualifies as a small cap, and definitions can vary depending on the market or index provider.
Smaller companies often have greater growth potential than larger, more established firms, which means small caps may offer the possibility of higher returns. At the same time, they tend to be more volatile. Investors therefore have the chance of above-average gains, but they also face a higher risk of significant losses.
Mid cap
Mid caps are stocks of companies with medium market capitalisation. They sit between small caps and large caps, and they generally represent companies that are more stable than small caps but still offer more growth potential than large caps.
There is no fixed definition for the market cap range that qualifies as a mid cap, since the thresholds can vary by region and by index provider.
Large cap
Large caps refer to stocks of large, established companies with high market capitalisation. These companies are often considered relatively stable and are typically better positioned to withstand economic downturns, which makes their stock prices less volatile.
Due to their size and high market capitalisation, large companies often have lower growth potential compared to small and mid-sized firms.
Many large companies distribute regular dividends, which can make large-cap stocks appealing to investors who seek a source of passive income.
Bearer stocks
Bearer stocks are securities that certify ownership in a company. This ownership entitles the holder (or bearer) to certain rights, such as voting at the annual general meeting. Because the shareholder’s identity is not recorded in the stock register, bearer stocks can be transferred very easily, for example through a sale on the stock exchange.
Although bearer stocks were once the most common form in Germany, many companies today choose to issue registered stocks instead. This allows companies to know who holds their shares and maintain an up-to-date shareholder register.
Registered stocks
Registered stocks are issued in the name of the shareholder, which allows the company to know who holds a stake. When purchasing this type of stock, the shareholder must be entered into the company’s stock register.
Because the shareholder is known to the company, communication is generally easier, for example when sending invitations to the annual general meeting or sharing other company news. For shareholders, transferring registered stocks requires a written transfer declaration. In some cases, additional company approval is needed, which can make selling these stocks more difficult.
Common stocks
As the holder of a common stock, you usually have the right to vote at the annual general meeting on matters related to the company’s development. Shareholders may also receive dividends, although dividend payments are not guaranteed and the amounts can vary.
If the company goes bankrupt, holders of common stocks may only claim their invested capital after creditors, bondholders, and preference shareholders have been paid.
This introduces a certain level of risk. However, common stocks have historically delivered higher long-term returns than preferred stocks and bonds.
Preferred stocks
Unlike ordinary stocks, preferred stocks do not grant voting rights on company matters. However, the shareholders have priority over ordinary shareholders in the event of bankruptcy. For companies, issuing preferred stocks is a way to raise equity while maintaining control, since these shareholders do not participate in voting.
Preferred shareholders typically receive fixed or predetermined dividends, and these are paid out before dividends to ordinary shareholders. This makes preference stocks appealing to investors who value stability and seek a potentially steady source of future cash flow.
