Common Stocks

Common stocks are securities that represent equity ownership in a corporation, and their value are based on market fluctuations.

Shareholders of these stocks exercise control by electing a board of directors and voting on corporate policy, which also entitles them to shares of the company's success through dividends and/or capital appreciation. However, these shareholders are at the bottom of the priority ladder for company ownership structure. In the UK, common stocks are known as "ordinary shares".

In the event of liquidation, or if the company goes bankrupt, the common stock shareholders will have rights to a company's assets only after the creditors, bondholders, preferred stock shareholders and other debt holders have received their respective shares of the leftover assets. This makes these stocks riskier than debt or preferred stocks. But the upside is that they usually outperform bonds and preferred stocks in growth over the long run.

Common shareholders are able to influence the corporation through votes on establishing corporate objectives and policy, stock splits, and electing the company board of directors. Some shareholders also receive preemptive rights, which enable them to retain their proportional ownership in a company should it issue another stock offering.

Dividends and capital appreciation.

Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to shareholders. When a corporation earns a profit or surplus, those funds can be put to two uses. They can either be re-invested in the company (retained earnings), or they can be paid to the stock holders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

Dividends are usually settled on a cash basis, as a payment from the company to the stock holder. They can also take other forms, such as store credits (common among retail consumers' cooperatives), and shares in the company (either newly-created shares or existing shares purchased in the market). Many public companies can also offer dividend re-investment plans, which automatically use the cash dividend to purchase additional shares for the stock holder.

Capital appreciation occurs when the share price of the stock in the market goes up. The price of a stock is affected by many factors such as the company’s earnings, research and development, the economy, and so on. As long as the perceived value of a company increases in the market, there will be more buyers than sellers, thus increasing the share price of the stock.

Stocks generally take the form of shares of either common stocks or preferred stocks. As a unit of ownership, common stocks usually carry voting rights that can be exercised in corporate decisions. Preferred stocks differ in that they typically do not carry voting rights but are legally entitled to receive a certain level of dividend payments before any dividends can be issued to other stock holders.

Common Stocks versus Preferred Stocks

These two classes of stock come with different financial terms and offer varying rights in relation to the overall governance of the company. Here are several of the key differences between these two types of stocks and the implications for how each type is utilized:

Common Stocks

While these stocks do offer dividends, the payment of dividends can hinge on a company's capacity to grow or at least maintain its current or retained earnings. This means that ongoing payments of dividends cannot be guaranteed.

This type of ownership has the additional benefit of enabling its holders to vote on company issues and in the elections of the organization's leadership members. Usually one share equates to one company vote.

Preferred Stocks

Preferred stocks don't offer the same potential for profit, but they are a more stable investment vehicle because they guarantee a regular dividend that isn't directly tied to the market. This type of stock guarantees dividends. The prices of preferred stocks are tied to interest rate levels, and tend to go down if interest rates go up and to increase if interest rates fall.

The other advantage of preferred stocks is that they have priority when it comes to the payment of dividends. And in the event of a company's liquidation, they get paid before those who own common shares.

In addition, if a company goes bankrupt, preferred stock holders also enjoy priority distribution of company assets, while common shareholders don't receive corporate assets until all preferred stock holders have been compensated. Bond investors take priority over both common and preferred stock holders. Preferred stocks also represent ownership in a company, except owners of preferred stocks do not get voting rights.

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