What Is Common Stock ?
Common stock (also known as a common share, ordinary share, or voting share) refers to a security that helps to attract investment in a joint-stock company. At the same time, it gives shareholders certain powers, such as the right to receive non-fixed profits (dividends) based on relevant decisions of the annual shareholders’ meeting.
Common Stock Overview
Ordinary shares are the most popular securities in the world. There are a huge number of exchanges that specialize in trading this type of shares, such as the New York, London, and Tokyo stock exchanges. It is also possible to trade these assets at online trading platfroms such as Monfex.com.
Understanding of the common shareholders’ rights will give you a clearer picture of what is common stock. As a rule, holders of common stock have the right to vote at a general meeting of shareholders. Dividends on common shares are not guaranteed and are paid out of the portion of the profit remaining after the interest is paid to holders of preferred shares.
In addition to dividends, an ordinary share gives owners the right to receive information about the organization’s activities. They are also empowered to manage the joint-stock company by participating in the annual meeting of shareholders. In the event of company liquidation, the owners get the right to receive part of the property that will remain after all other requirements for the company are satisfied.
Types of Common Shares
Ordinary shares typically fall into the following categories:
- Blue chip stocks. This type includes securities of companies that have successfully performed at the marker for many years. Their key features are stable dividends and high prices. Many of the largest indices include blue chip stocks only. Such assets are suitable for those who prefer stable dividends regardless of their size.
- Profitable shares or highly dividend stocks. These stocks are most often issued by relatively young enterprises, which are gradually entering broad markets. The price of profitable shares is usually lower than that of blue chips, and profitability is higher. But the main difference is the willingness to pay high dividends with business stability and high cash flows.
- Growth shares. This category includes assets that will show growth in the near future (most often undervalued stocks). Their key feature is the high price/earnings ratio. At the same time, dividends on such securities are not always paid. When company management ceases to direct profits to business development, the growth period ends.
- Value stocks. This type of asset is securities with a low price/profit ratio. The main reason is typically the fall in sales in the last reporting quarter, force majeure, and other unpredictable factors. Such stocks are acquired by long term, patient market participants. However, it is always worth considering the risk that such ordinary shares may not rise in value.
- Cyclic shares. The price of these shares depends on the key economic indicators. When the economy is growing, the quotes of such securities also grow. In the case of an economic decline or crisis, cyclical assets become cheaper. For example, such are the securities of construction companies and car manufacturers: the prices of their shares are often dependent on market circumstances, so prices can fluctuate a lot.
- Protective stocks. Such securities show little or no reaction to falling markets in times of crisis. Among them are pharmaceutical and food enterprises, as well as other manufacturers of essential goods. However, the shares of these companies do not grow in price during the economic recovery. Most often, they act as assets for diversification when there is a threat of crisis.
- Speculative shares. They have the highest potential for increasing value among securities, but at the same time, they are the riskiest. Companies issuing such shares may even liquidate their business if financial problems turn out to be too serious. Speculative securities are often issued by very young companies and startups.
For more useful information about the types of stocks, refer to further articles at Monfex.com.
Common Stock vs Preferred Stock
The key difference between common stock vs. preferred stock is as follows. Common shares allow the holder to have a share in the company, the right to receive dividends, and the right to vote at general meetings of shareholders. Preferred shares differ from ordinary shares in that their holder cannot vote at general meetings of shareholders, but has the preemptive right to receive dividends. If the company decides to pay dividends, then preferred shareholders of preferred shares will receive them first. This is the main difference between common stock vs. preferred stock.
Characteristic of Common Stock
The key characteristic of common stock is that the shareholder cannot demand a refund of the security amount from the issuer - this gives the company extensive opportunities for financial management. Another characteristic of common stock is perpetuity: the share loses its status after the issuing company is liquidated. This can happen, for example, by a court decision (forced liquidation) or as a result of a company reorganization.
The shares can also be “diluted” - a new batch is issued, after which the value of one security falls. The decision on an additional issue is made, as a rule, by the board of directors, and in more rare cases - by the board of shareholders. The first option is preferable because not all shareholders are aware of the current state of the company and its needs. Important: the purpose of the additional issue of ordinary shares cannot compensate losses incurred by the enterprise.
Common stock is a type of share that gives its holder specific rights and is used to attract investments in a joint-stock company. It is the most popular type of stock that is widely traded at the world’s largest exchanges. Unlike preferred shares, common shares give its holders voting rights. At the same time, ordinary shareholders are the last to get their dividend payments, whereas the preferred shareholders, creditors, and bondholders are the first.
We hope that now you have a better understanding of what is common stock. Check out other helpful glossary articles at Monfex.com.