Common Stock
Common stock represents ownership in a corporation and typically comes with voting rights at shareholder meetings. Shareholders may receive dividends and have the potential for capital appreciation. Common stockholders are considered residual owners, meaning they have a claim on the company's assets and earnings after bondholders and preferred stockholders have been paid.
6 Key excerpts on "Common Stock"
eBook - ePubClever Girl Finance
Learn How Investing Works, Grow Your Money
- Bola Sokunbi(Author)
- 2020(Publication Date)
- Wiley(Publisher)
...This is the type of stock most people purchase for their investment portfolios. Holders of Common Stock (shareholders) have certain benefits, like voting privileges where they can vote to elect a company's board of directors or vote on changes to corporate policy. The number of votes they can make depends on the number of shares they own. In addition, shareholders might receive dividends depending on the company's profitability in a given quarter or year and are provided with the company's annual report, which keeps shareholders informed about the company's performance. Preferred stock. Preferred stock has certain advantages over Common Stock in that preferred stock owners have a greater claim to the company's assets and typically earn a fixed dividend payment regardless of how the company is performing. In addition, if the company goes bankrupt, preferred stockholders get paid before Common Stockholders. However, preferred stock also has its own disadvantages. For instance, preferred stockholders have very limited or no voting rights. Also, a fixed dividend may actually limit the value of their stocks, for example, if the company is performing much better than the value of the fixed dividend the preferred shareholder is receiving. Based on the differences between the two types of stocks, you assume more risk as a holder of Common Stock but stand to gain considerably more than preferred stockholders when the company is doing well and growing. As mentioned earlier on, companies sell stock to raise capital from investors in order to grow their businesses. You buy their stock and in return they incentivize you by aiming to improve the value of the stock by growing the business. As an added bonus, some companies will even pay out dividends tied to their performance and profitability. MARKET CAPITALIZATION AND STOCKS If you read or listen to any financial news, you've probably heard the terms market capitalization or market cap...
eBook - ePubThe Handbook of Traditional and Alternative Investment Vehicles
Investment Characteristics and Strategies
- Mark J. P. Anson, Frank J. Fabozzi, Frank J. Jones(Authors)
- 2010(Publication Date)
- Wiley(Publisher)
...CHAPTER 2 Investing in Common Stock Common Stocks are also called equity securities. Equity securities represent an ownership interest in a corporation. Holders of equity securities are entitled to the earnings of the corporation when those earnings are distributed in the form of dividends; they are also entitled to a pro rata share of the remaining equity in case of liquidation. Common Stock is only one type of equity security. Another type is preferred stock. The key distinction between the two forms of equity securities is the degree to which their holders may participate in any distribution of earnings and capital and the priority given to each class in the distribution of earnings. Typically, preferred stockholders are entitled to a fixed dividend, which they receive before Common Stockholders may receive any dividends. Therefore, we refer to preferred stock as a senior corporate security, in the sense that preferred stock interests are senior to the interests of Common Stockholders. What determines the market price of a share of Common Stock? Like anything else, price depends on what people are willing to pay. The price of a share of stock today depends on what investors believe is today’s value of all the cash flows that will accrue in the future from that share of stock. In other words, investors are not going to pay more today for a share of stock than they think it is worth—based on what they get out of it in terms of future cash flows. What people are willing to pay for a share of stock today determines its market value. This theory of stock prices makes sense. If we could accurately forecast a company’s cash flows in the future, we could determine the value of the company’s stock today and determine whether the stock is over- or under-valued by the market. But forecasting future cash flows is difficult...
eBook - ePub- Frank J. Fabozzi, Frank J. Fabozzi(Authors)
- 2018(Publication Date)
- Wiley(Publisher)
...Chapter 4 Common Stock Frank J. Fabozzi, Ph.D., CFA Adjunct Professor of Finance School of Management Yale University Frank J. Jones, Ph.D. Chief Investment Officer The Guardian Life Insurance Company of America Robert R. Johnson, Ph.D., CFA Senior Vice President Association for Investment Management and Research In this chapter we will discuss the investment characteristics of Common Stock, explain the markets where Common Stock is traded, the arrangements made for the trading of Common Stock by retail (i.e., individual) and institutional investors, and review Common Stock portfolio strategies. Common Stock VERSUS PREFERRED STOCK Common Stocks are also called equity securities. Equity securities represent an ownership interest in a corporation. Holders of equity securities are entitled to the earnings of the corporation when those earnings are distributed in the form of dividends ; they are also entitled to a pro rata share of the remaining equity in case of liquidation. Common Stock is only one type of equity security. Another type is preferred stock. The key distinction between the two forms of equity securities is the degree to which their holders may participate in any distribution of earnings and capital and the priority given to each class in the distribution of earnings. Typically, preferred stockholders are entitled to a fixed dividend, which they receive before Common Stockholders may receive any dividends. Therefore, we refer to preferred stock as a senior corporate security, in the sense that preferred stock interests are senior to the interests of Common Stockholders. Preferred stock is discussed Chapter 12. WHERE STOCK TRADING OCCURS It is in the market for Common Stock through the trades they make that investors express their opinions about the economic prospects of a company...
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What are Stocks? Stocks are financial instruments that are issued by publicly traded corporations. These shares of stocks prove to be the tiniest portion of ownership that you can acquire in a company. Even by owning a single share of a company’s stock you are a small part owner of the firm. Owning shares of stock gives you the privilege of voting for the underlying company’s board of directors, along with other critical issues that the company is considering. Should a company decide to distribute earnings to share holders as dividends, then you will get a portion of them. With the ownership of stock, your liability in the company is only limited to the value of your shares. This means that should a company lose a lawsuit and be forced to pay an enormous fine or judgment, then you can not be made to contribute to it. The company’s creditors also can not pursue you if the company runs into financial trouble and goes bankrupt. Two different types of stock shares exist. These are common shares and preferred shares. The vast majority of shares that are issued are Common Stock shares. These are the shares that members of the public hold most of the time. They come with full voting rights and also the possibility of receiving dividends that the company pays out. Preferred stocks come with fewer voting rights but give preferential treatment for dividend payment. Preferred stock issues are paid out before common share dividends. Companies that offer preferred stock typically pay dividends on both classes of shares anyway. Preferred stocks also have a higher claim on the assets of a company if it fails. Liquidity is a feature of stocks that should always be considered. Common Stock shares are almost always more liquid than are preferred shares. Large companies offer the greatest amount of liquidity in the trading of their stocks...
- H. Kent Baker, John R. Nofsinger, Andrew C. Spieler(Authors)
- 2020(Publication Date)
- Emerald Publishing Limited(Publisher)
...As a Common Stockholder, you typically have voting rights but aren’t guaranteed dividends. Given your residual claim on a firm’s earnings, you may receive dividends, but only after the company has paid interest to its debtholders and dividends to its preferred stockholders. In the event of firm bankruptcy, you’re the last to receive any payments and there usually isn’t much, if anything, left. As an owner of preferred stock, you usually don’t have voting rights but have a higher claim on earnings and assets than do Common Stockholders. You often receive scheduled dividend payments. Some investors may prefer owning preferred stock instead of Common Stock because preferred stockholders have a greater claim to a company’s earnings and assets. Generally, investors buying preferred stocks do so because these stocks tend to pay larger and more stable dividends and to have lower volatility than that company’s Common Stock. However, Common Stockholders participate in a company’s growth through increasing dividends, whereas preferred stock dividends are usually fixed. Thus, investors consider investing in preferred stock as an alternative to bonds because of the attractive dividend yield. You should keep in mind that the overall investment risk of owning preferred shares is riskier than bonds. By contrast, preferred stock has less potential for profit than Common Stock due to lower overall risk. 2.3. WHAT ARE THE PROS AND CONS OF INVESTING IN STOCKS? Investing in stocks involves both pros and cons. As with any investment, the ultimate goal of stock ownership is to make money. Pros. Investors buy stock in a company for various reasons. First, stocks offer the potential for higher returns compared with other types of investments such as bonds over the long term but are generally riskier. This fact follows the most basic financial principle that savvy investors know well: taking more risk offers greater expected return in the long run...
eBook - ePub- W. Sean Cleary(Author)
- 2017(Publication Date)
- Wiley(Publisher)
...Chapter 8 EQUITY SECURITIES: COMMON AND PREFERRED SHARES CSC EXAM SUGGESTED GUIDELINES: 13 questions for Chapter 8 INTRODUCTION A common share provides proportionate ownership in the company's equity value, the value of which will change in response to changes in the value of the firm's equity and the number of shares outstanding. These shares will be attractive to investors looking to profit from the future accomplishments of the issuer. A preferred share provides the owner with a claim to a fixed amount of equity that is established when the share is first issued. These will be more attractive to investors who desire steady income and a more secure position than common shareholders hold with respect to claims on the assets and income of the company. COMMON SHARES Common share capital is sometimes referred to as risk capital to reflect the possibility of total loss of investment if the issuer fails. Today, most share certificates are in “street form,” which makes them easily transferable. ! The following rights are associated with common share ownership: Potential for Capital Appreciation : As earnings are reinvested in the firm, the asset base and common equity base grow. Stock splits have little effect on existing shareholders. For example, a two-for-one split doubles the number of shares authorized, issued, and outstanding, and will likely cause the market price to fall to half of the previous market price. They are typically used to obtain a price in a target range that will entice investors and prevent odd-lot problems that may be associated with high-priced shares. Reverse splits (or consolidations) occur when shares are trading at a value that may be unattractive to investors because it is too low. ! Right to Receive Common Dividends : The firm's dividend policy is established by the board of directors, and dividend payout ratios vary across firms and industries...
