Business

Common Stock – Definition, Risks, Future Prospects, Benefits, Features, And Limitations

Common Stock

The US represents 54.5% of the world stock market cap. Moreover, the global stock market cap of the common stock market soared up to $95 trillion in 2020. These numbers are pretty much seducing if you are interested in investing in the stock business.

The stock market business is one of the most volatile investment paths one can follow. Although there is a considerable success rate in the long term, owning the right common stock comes after a series of market research and knowledge in the stock market.

Now, if you want to own a common stock yourself, you need to know about some aspects of the common stock. What is common stock? Is common stock an asset? After reading this article, you will have answers about all these primary aspects of common stock.

What Is Common Stock?

What Is Common Stock?

Common stock is a security of a company-issued to the majority of the shareholders of a specific company. Owning a common stock means having a fraction of ownership within a corporation.

The common stockholders have the right to elect the board of directors of a corporation and voting rights on corporate policies. Therefore, if you purchase a stock, you earn the possibility of making a large profit in the long term.

A company usually sells commons stocks for the –

  • Expansion of the company
  • Paying debts
  • Reservation of suture assets.

During the liquidation of the company’s assets, the common stockholders can have their rightful stake just after the bondholders, preferred stockholders, and debtholders. However, if any company were to liquidate their asset, the common stockholders could not claim their stake unless the previous categories were paid.

How Does Common Stock Work?

How Does Common Stock Work?

Here is a common stock example to help you understand how it works-

When someone owns a company’s stock, they can own a percentage of the company. If a company has 100 shares, owning one of those shares means owning one percent of the company. In short, a share of common stock is a claim on a corporation’s ownership.

Common Stock Features

Common Stock Features

Several features make common stock holding a unique investment. A common stockholder is offered the below facilities.

As a common stockholder, the holder may earn-

  • Dividend rights
  • The right to get remaining assets during the liquidation.
  • Right to elect the board of directors and to vote on corporate policies.
  • Right to receive consideration.
  • Investors get capital and dividend incomes. The growth of the company means their growth.
  • Investors can invest through a direct stock plan.
  • They can invest through a dividend reinvestment plan.
  • Investors can also invest in mutual funds or through stock exchanges.

Read More About: What Are Growth Stocks? A Complete Guide

Common Stock Benefits

Common Stock Benefits

The long term success is the most desired benefit for a stock investor. But there are several benefits of owning a stock. Here are some of the key benefits of owning a common stock-

Right To Vote

Since owning a stock means owning the percentage of a company, investors get the right to vote on the company’s business decisions. They can attend board meetings, have the right to elect the board of directors, and also have the right to corporate decision-making. A common shareholder has the right to vote for strategic policy. The more shares a common shareholder has, the more they can utilize their power. 

High Returns

A common stockholder can benefit more than bondholders or deposit certificate holders. There is no benefit limit as to how much a stockholder can benefit from the affiliated company’s profit. The benefit is proportional to the stock percentage a common stockholder has.

These shares are less expensive and more feasible compared to the debts. As a result, companies don’t have to pay a lot of debt interests.

The common stock shareholders need not concern themselves with anything but financial investments. If the company grows exponentially, this investment policy offers a safe future for investors.

The investors don’t have to think about anything related to the legal side of the company. Also, an investor won’t lose anything more than the asset they have invested in if the company ever runs on loss.

Liquidity

Common stocks are liquid which means that the shareholders can easily invest in and surrender their stocks. The liquidity offers the investors the opportunity to increase their shares or surrender them at will. If the investors feel that the profits on their investments are not turning out the way they pictured, they can surrender their shares.

Gains

Common stock shares do not assure return on a specific date. As to how frequently a shareholder may receive their returns is uncertain. Some companies don’t profit enough to offer frequent dividends to the shareholders. But, the chance of gaining a substantial return is higher on common stock investments.

Read Also: What Is The Most Expensive Stock Of All Time?

Common Stock Risks And Limitations

Common Stock Risks And Limitations

As I have said earlier, common stocks are very volatile. The higher the chances of return, the higher the risk of losing common stockholding. When the liquidation of a company’s stock happens, the stockholders come last in the line to claim their stakes. Here are some risks and limitations of common stocks-

Volatile Market

The stock market is volatile. If the company performs badly, the common stock shareholders are exposed to most of the damage. Since they hold a fraction of the company’s ownership, they can lose most of their assets if they go bankrupt.

No Fixed Amount Of Return

The return on the common stock investment is not guaranteed. In this case, the market force decides the amount an inverter earns. In addition, there is no specified time as to when you might receive profit. So, if you have invested in common stock speculating growth potential, you may be disappointed.

Minimum Control

As a stockholder, you may have the right to vote for strategic decision-making. However, you cannot use the power to the fullest potential with a minimum percentage of shares.

Since the will of the other stockholders matter the same way, you need to acquire a major percentage of the shares if you want the board’s decisions to work in your favor.

Conclusion 

There are several advantages and disadvantages of common stockholding. The amount of risk that comes with investing in the stock market is understandable, judging the return you may have. However, if you have practical knowledge of the stock market, you can choose the stocks that have the potential of returning a high amount. I hope the primary ideas I have talked about common stocks help you.

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