Common Stock

What is a Common Stock?

Common stock is an equity instrument that represents a small portion of company ownership. The stockholders enjoy dividends once or twice a year. Not like preferred stocks or bonds, the common stock declares a high dividend. As this type of investment has a high dividend yield, it is also a risky investment. The owner can lose the value of the stocks. Also, if there is any downtime, the common stockholders may not enjoy any dividend, unlike preference shares.

As it represents ownership, the stockholders have the rights to elect the board of the directors and voting rights. So, the common stock holders elect the board of the directors of a company.

Features of Common Stocks

One of the most popular features of common stock is that anyone can buy and own it, hold it, and sell it when in profit. Also, if anyone wants, s/he can hold it forever and enjoy the yearly dividend for a lifetime.

Common stocks have many unique and popular characteristics; this is why its very popular investment all over the world.

• Common Stocks Represent Ownership of a Company

A piece of stock represents a portion of ownership of a company. That means, when you hold a portion of the company’s total stocks, you are one of the owners of the company.

For example, if a company has 1000 shares traded in the market and you hold 100 shares of that company, then you are the owner of one-tenth of that company.

• The Voting Rights of Common Stock Holders

As a common stockholder of a company enlisted in the stock market, you have the capability of casting the vote while selecting directors’ board. This privilege gives you the right to select the most efficient person for the company. Sometimes, shareholders express their opinion in the major decision making for the company by voting e.g. mergers & acquisition etc.

• The Value of Common Stocks

The value of the common stocks is not concrete. That means the value fluctuates time to time. The value of the common stock is backed by the value of the main company.

• Capability of Receiving Periodic Dividends

The dividend is the most important part of a common stock. The image, capability, or attracting investors vastly depend on the dividend declaration capability. As a common stockholder, you have the rights or capability of receiving the periodic dividend.

• Characteristic of Limited Liability in Common Stocks

When it is about the liability of the ownership, you have the limited liability in common stocks. In simple words, the portion you have purchased from the stock market is actually your total liability.

For example, you are holding 10 shares of a company which has 100 shares trading in the market. So, if the company goes bankrupt, the maximum amount you can lose is the value of 10 shares.

• Profit and Risks Relation in Common Stocks

The profit and risk relation is high in the case of common stock. That means, when the risk is high for a specific stock, the return will be high as well. Conversely, if the risk is low, the possible return will be low as well.

• Tax Exemptions (Indirect)

It is an indirect characteristic that is dependent on the decision of the government. In some countries, the income from the common stocks is not taxable. So, the money you earn from stock trading or investment is tax exempted.

• Claim on Assets

If the company goes bankrupt, you get some portion of the asset after paying the company’s payable to the preferred stockholders of the company.

• Chances of Losing Everything in the Case of Bankruptcy

When it becomes bankrupt, there is a big chance that you do lose everything. That is because the stock price may go to the value at zero. And if there is nothing left after paying the preferred stockholders, you cannot get anything as there is nothing left.

• Right to have Capital Gain

When you buy a stock, the price may go up or down. This is one of the primary characteristics of common stocks. In this case, you do have the right to sell the share to others and lock your profit. As there is an appreciation in the capital, it is called capital gain.

• Volatility of Common Stocks

As the stock is traded in the market by the traders and investors, different people allocate different value for the same stock. So, the price of the stock becomes very volatile. In the morning you are seeing a price may not be the same price in the evening.

• Uncertain Return

There is uncertainty in the return of stock investment as the value is dependent on many factors such as company earning, taxes, industry factors, or macroeconomic factors.

Characteristics of common stock:

Common stocks are the most common form of equity investment. All corporations issue common stock and are controlled or owned by the shareholders or owners. Following are some of the most important characteristics of common stock:

1) Common stocks provide a share of ownership in the company, unlike other type of securities like bonds, which do not.

2) Common stockholders have the right to vote at annual meetings ,with each share entitling the holder to one vote. They will also receive audited financial statements of the company.

3) Common shareholders are entitled to receive dividend payment, if they are authorized by the corporation's board of directors. Dividends can be paid in the form of cash or stock. However, dividend payments are not guaranteed but are normally based on the financial success of the corporation.

4) When a company issues new shares, existing common shareholders have the preemptive rights to buy additional shares directly from the company, often below the market price, before they are offered to other potential investors.

5) In the event of dissolution or liquidation, common shareholders have last claim on the company's assets. They are the last to claim any amount remaining from the liquidation of corporate assets after the creditors, bondholders and preference shareholders are paid.