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What is Common Stock?


Common stock is a type of security that offers investors ownership in a business and includes an ability to take a part in a company’s decisions.

Common stock and its basics

Key characteristics of common stock include:

  • Availability: This is the most popular technique for investors to acquire stock in a corporation.
  • Voting rights: These shares typically have voting rights that allow investors to have a vote in some corporate decisions, such as choosing directors to serve on the board, as well as specific business events, such as mergers, acquisitions, or stock splits.

Common stock VS preferred stock

Both common stock and preferred stock offer the potential for investors to hold a portion of a business. However, preferred stock has some advantages as its name implies:

– Dividends first: If a corporation pays dividends, preferred stockholders are paid first. Any remaining dividend funds are then distributed to common stockholders. If a company’s dividend is ultimately suspended, the payouts earmarked for preferred shareholders swell. If the business starts paying dividends again, preferred shareholders receive their money before common stockholders receive a dime. Missed dividends are not accumulated by common investors.

– Dividend Amount: the dividend paid to preferred shareholders has a predetermined amount (similar to how the interest payment on a bond is fixed).

– Conversion of share classes: Preferred stockholders may have the option to convert their preferred shares into common stock, which is known as convertible preferred stock. It’s a type of stock in which the owner of the stock, the company’s board of directors, or the company could convert the preferred shares into common shares at a later date.

Calculating common stock

Common stock is normally listed in the shareholders’ equity part of balance sheets. Along with other categories of stock, such as preferred stock and treasury stock, it is listed on balance sheets. Common stock previously issued by a company that has been acquired from its stockholders but has not yet been retired is known as treasury stock. The average number of outstanding common shares is multiplied by the total common stockholders’ equity, less preferred stockholders’ equity, to determine the value of common stock. “Book value” is what accountants and financial analysts refer to as. Rarely does the market value of common stock match its book value. Investors in the stock market determine the company’s market value, while its assets determine its book value.

Why is issuing common stocks beneficial for businesses?

Common stock is frequently issued by public and private companies alike. However, common stock of private corporations is often held only by the founders, investors, and occasionally even certain employees. When a private company wants to become public, they might do an initial public offering (IPO), in which they sell shares in a similar way to raise money. However, after the IPO, the shares are traded openly.

Also corporations may choose to raise money by issuing more common stock (also known as making more common shares accessible) or by going through the IPO process. Companies may utilize the proceeds from the sale of their common shares to finance corporate acquisitions, debt repayment, and growth investments.

How can I buy common stock as an investor?

Common stocks are available for purchase on both public and private markets (FYI, private markets are less flexible, less accessible, and less easy to buy or sell compared to public markets). Stock exchanges in public marketplaces allow day-long buying and selling of stocks. Investors typically purchase shares through a traditional broker, an online broker, or perhaps even directly from the business.

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