Concept and features of Common Stocks


Concept and features of Common Stocks

Common stock or ordinary share is also the most important form of corporate stock. Common stock holders are the real owners of a firm. These stock holders invests in firm  with the expectation of return in future. This is because , they receive only the residual left after satisfying the claims of all on firm's assets and income. Investors of such stocks create the complete risk of ownership as the business may fall to unacceptable level. However the risk of common stock is is limited and the stockholders are only responsible for the amount of funds invested by them and no more than that.

Here, each share of stock is represented by a stock certificate which is the unit of ownership in the firm. The accurate percentage of ownership of a shareholder depends on the number of shares received in total number of shares. Each of this share is the claim of their firm's income left after payment of all expenditure of the firm. Two forms of shareholders' investment is represented by the share of common stock. The investor invests direct equity while using stock initially.  Additional income generated from firm's development is either distributed to the common stock holders as dividend or it is retained in the company itself in the form of retained earning. This decision of distributing dividend or retaining the income  depends upon the board of directors decision.

To say in general, the common stock is the registered instrument as the name of stockholder is being recorded in the book of issuing company. There are wide varieties of features including advantages and disadvantages in common stock.

Features of Common Stock

Common stock is very popular among ordinary middle class people, it yields great profit with average investments. Some of the features of common stock are.

 

  1. Par Value: The price arbitrarily printed in each common stock certificate is par value. Par value is always determined less than the present market value of the stock. However some common stocks are issued without par value. While buying the stock par value is regarded as the initial investment of the owner is the firm.

  2. Classified Common Stock: Firms issues common stock more than one class from time to time. This process is carried out in order to control and dividend payment. example: if the firm issues the class X stock and class Y stock, The X class stock has voting right  and Y class do not have voting rights Now from these stock which do not have voting rights,the initial promoters get control over whole vote. In this case if cash dividend is to be divided or distributed or the firm is to be dissolved, more priority is given to Y class stocks than X class in assets and earning.

  3. Volume of Stock: Firm's charter determines what quantity of stock can be issued. Now is additonal shares are to be issued by company's charter, it can only be done by amending the charter with the approval of stockholders.

    charter, it can only be done by amending the charter with the approval of stockholders.

  4. Maturity date:  While you purchase a common stock there are no any maturiy date. Being common stock a residual security, generally they dont have anything such as maturity date. These stock remains so long as the firm survives. However the number of share may increase or decrease.

  5. Ownership: Common stock may have ownership of only a person or of a small group of investors or public ownership of large group or institutional investors. Ownership of these kind of stock is easy and people prefer to invest in common stock more than other stocks.

  6. Ownership Rights: People inesting in common stock has wider scope in ownership rights as thy are assigned with various rights associated with ownership. The common stock holders are assigned  the following rights.
     

  • Right to Earnings:  Common stock holders always have right in earning and dividend if declared. As the common stock is residuals security, stockholders has right only in the earning available to them. Beside these earnings if the board of director of the company decides to distribute dividend without keeping the retained earning, they also hae rights to get dividend.
  • Right to assets: If there is the case of dissolution of the firm the stockholders also have rights to assets. The stockholders has right to take the remainng assets after the end of firm's life. However if the firm is closed due to bankruptcy, nothing is left behind for stockholders. And in case if firm is dissolved and is purchased by other firm, the stockholders gets the amount left after payment of all liabilities.
  • Rights to Vote:  Common stockholders has right to vote in the affairs of the company.In most case of common stock, each shareholder can cast one vote in one share. However, sometimes the stocks not permiting the shareholders to vote are also  issued.
  • Preemptive right: Most of the companies give preemptive right to their shareholders. Preemptive right provides an opportunity to the common stockholders to purchase common stock or comvertible securities before selling to the general public. However this right can and can't be taken by shareholders.
  • Certificates and Transferability :  Purchasing common stokes, shareholders has right to get their stock certificate showing the evidence of ownership. The person who has common stock or who buys common stock can also sell it or transfer it to other person. Transfering the ownership in a systematic way by assembling the sellers and buyers is one of the most important functions of the secondary market. In some case shares are also issued by keeping limit to transfers.