The common stock is one of the popular instruments in the stock market. It is the most popular one in the whole world for its characteristics. Because of its unique features, it stood first in the priority list of stock market instruments; and secondly, bonds. By reading this post, you will learn about the key features or characteristics of common stocks.
I have talked about the formation of common stock in my post common stock explanation from trading and investment perspective. You can read the post if you want. In this post, I will discuss the major and minor features.
Common Stock Definition
Common stock is an equity instrument that represents a small portion of company ownership. The stockholders enjoy dividends once or twice a year. Not like preferred stocks or bonds, the common stock declares a high dividend. As this type of investment has a high dividend yield, it is also a risky investment. The owner can lose the value of the stocks. Also, if there is any downtime, the common stockholders may not enjoy any dividend, unlike preference shares.
As it represents ownership, the stockholders have the rights to elect the board of the directors and voting rights. So, the common stock holders elect the board of the directors of a company.
Key Features or Characteristics of Common Stocks
One of the most popular features of common stock is that anyone can buy and own it, hold it, and sell it when in profit. Also, if anyone wants, s/he can hold it forever and enjoy the yearly dividend for a lifetime.
Common stocks have many unique and popular characteristics; this is why its very popular investment all over the world.
Common Stocks Represent Ownership of a Company
A piece of stock represents a portion of ownership of a company. That means, when you hold a portion of the company’s total stocks, you are one of the owners of the company.
For example, if a company has 1000 shares traded in the market and you hold 100 shares of that company, then you are the owner of one-tenth of that company.
The Voting Rights of Common Stock Holders
As a common stockholder of a company enlisted in the stock market, you have the capability of casting the vote while selecting directors’ board. This privilege gives you the right to select the most efficient person for the company. Sometimes, shareholders express their opinion in the major decision making for the company by voting e.g. mergers & acquisition etc.
The Value of Common Stocks
The value of the common stocks is not concrete. That means the value fluctuates time to time. The value of the common stock is backed by the value of the main company.
Capability of Receiving Periodic Dividends
The dividend is the most important part of a common stock. The image, capability, or attracting investors vastly depend on the dividend declaration capability. As a common stockholder, you have the rights or capability of receiving the periodic dividend.
Characteristic of Limited Liability in Common Stocks
When it is about the liability of the ownership, you have the limited liability in common stocks. In simple words, the portion you have purchased from the stock market is actually your total liability.
For example, you are holding 10 shares of a company which has 100 shares trading in the market. So, if the company goes bankrupt, the maximum amount you can lose is the value of 10 shares.
Profit and Risks Relation in Common Stocks
The profit and risk relation is high in the case of common stock. That means, when the risk is high for a specific stock, the return will be high as well. Conversely, if the risk is low, the possible return will be low as well.
Tax Exemptions (Indirect)
It is an indirect characteristic that is dependent on the decision of the government. In some countries, the income from the common stocks is not taxable. So, the money you earn from stock trading or investment is tax exempted.
Claim on Assets
If the company goes bankrupt, you get some portion of the asset after paying the company’s payable to the preferred stockholders of the company.
Chances of Losing Everything in the Case of Bankruptcy
When it becomes bankrupt, there is a big chance that you do lose everything. That is because the stock price may go to the value at zero. And if there is nothing left after paying the preferred stockholders, you cannot get anything as there is nothing left.
Right to have Capital Gain
When you buy a stock, the price may go up or down. This is one of the primary characteristics of common stocks. In this case, you do have the right to sell the share to others and lock your profit. As there is an appreciation in the capital, it is called capital gain.
Volatility of Common Stocks
As the stock is traded in the market by the traders and investors, different people allocate different value for the same stock. So, the price of the stock becomes very volatile. In the morning you are seeing a price may not be the same price in the evening.
Uncertain Return
There is uncertainty in the return of stock investment as the value is dependent on many factors such as company earning, taxes, industry factors, or macroeconomic factors.
In conclusion
Because of its diversified and unique characteristics, the common stock became the most popular instrument among the investors and traders all over the world.
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Sheikh Faizul Haque is an internet entrepreneur and the founder of The Strategy Watch; Graduated from North South University with a double major in Accounting & Finance in Bangladesh.
With a strong interest in developing and improving Business Strategy and to Conduct Business Analysis.