Everything on Common Stocks

What is Common Stock ?

The common stock of a company is a security that represents the ownership of an investor in a corporation. The board of directors are elected by common share holders. They also have voting rights that allow them to vote on company policies. As a form equity ownership, common shareholding can provide higher long-term returns. Common shareholders have the right to claim company assets in the event of liquidation. This is after preferred shareholders, bondholders and other debtholders have been fully paid.

Common stocks can be issued from the company's initial public offerings (IPO). Common stocks can be reported in the stockholder equity section of the company's balance sheets. The total treasury stock can be subtracted from the total shares to express the number common stocks offered by a company.

Understanding the Meaning and Purpose of Common Stock:

We now know what 'common stock' means. The question is: What is the purpose of issuing them. Common stock issuing common shares is primarily about raising capital. These are the possible uses of capital raised by a company:

Acquisition of a promising business

- Establishing a future cash reserve

- Expansion

- Repaying outstanding debts

Common stock issuing can lead to the market diluting the holdings of existing shareholders. The company's goal may be to either avoid or aim for dilution. These motivations could lead to more common stock being issued by a company.

Common Stock Advantages

Here are the benefits of issuing common stock:

Voting Rights

An investor is granted one vote per share of common stock. Investors can use these voting rights to participate in the development of corporate policies and other business decision making. In some cases, investors can elect the board by exercising their voting rights. Investors who have more common stocks can influence the company's policies more effectively.

Potential earnings

Common stocks perform better than deposit certificates or bonds. Common stock investments can be made at any level. There is no limit to how much an investor could earn. They are also an affordable and more practical alternative to investing in debt.

Limted legal liabilities

The obligations of common shareholders ceases to exist beyond the financial investments that are made within the company. They do not need to worry about legal liabilities. Common shareholders receive a fixed income if the company generates steady growth over time. They are not responsible if the company liquidates, or becomes involved in legal problems.

Liquidity

Investors can easily invest in common stocks or give them up. Investors can buy more shares and also withdraw their funds if they are not satisfied with the performance of a company. Liquidity allows investors to make their investments do what they want without too much hassle.

Common Stocks Limitations

Uncertainty

Common shareholding is not a guaranteed source of income, but it can still be considered a fixed income option. However, there are no guarantees that you will receive any payouts. The difference is that income can not be guaranteed at the time one expects. This depends on how the company allocates funds. Common stockholders do not receive priority payouts when dividends are paid to investors. They get their dividends only after bondholders and preferred shareholders have received all of their dividends. There is uncertainty and lack of control over the profitability of common shares.

Market Risks

Market risk is another risk associated common shares. Market risk refers to the possibility of the company's performance slipping over time. A decrease in performance could lead to profits being lost and shareholders not receiving the dividends they desire. Common shareholders do not always get the benefit payouts, even if the company is performing well. This is an important factor to remember.

Conclusion

Common stock can be used to share passive ownership of a company. Common stock holders have voting rights, without having to comply with company laws. Common stocks are not profitable due to the way they are paid out and the company's ability to delay dividends until funds become available.