Summary: Common Stocks

What is Common Stock?

Common stock are the financial securities that represents the ownership of the shareholders in
any corporation. It gives voting rights to its holder. Residual owners of the company, common
stockholders are entitled to dividend income and a prorated share of the firms earnings after
all other obligations of the firm have been met. They have no guarantee that they will ever
receive any return on their investment.

When there is a liquidation got benefit when the corporation satisfied the other bondholders,
debt holders and preferred stock holders.

Common stock is a popular way of investing and it is used by the individuals as well as the
institutions. Common stock gives opportunity to investors to shape their needs and preferences.
When the market is strong the investors gets the steady stream of income.

Pros and Cons of Stock Owner Ship

Pros

Common stocks gives more return opportunities. It offers attractive and high
competitive returns.
Common stocks are easy to buy.
Common stocks are easy to sell.
Common stocks have modest transaction cost.
We can easily get the market information through market media.
The unit price of common stock is normally for the individual investors.

Cons

Risk is the most significant con of the common stock. It faces various types of risks like

Financial risk
Purchasing power risk
Market risk
Event risk.
All of these risks had a great impact on stock earnings, dividends, price appreciation and above
all the rate of return. There are many factors that can affect the common stocks return like
government control and regulation, foreign competition and the state of the economy. These
factors affect the sales and profits, thats why they also affect the price behaviour of the stock
and possibly even dividends.

These all disadvantages leads to another disadvantage that the general performance of the
stocks are subject to wide swings. It is difficult to select that which stock will perform well. It
made the selection process difficult and complex. Therefore, selection should be perfect while
sleeting the common stocks.

Basic Characteristics of Common Stocks

In common stocks, the every share shows the equity or we can say the ownership of the investor
in a company. This is the reason that sometimes common stocks are stated as equity securities
or equity capital.

Equity capital is the evidence of ownership position in a firm, in the form of shares of common
stock.

Every share gives an equal proportion of ownership to the investor in the company. It allows
the investor to participate in corporations earning, dividends, equal vote right and equal voice
in management. We can easily say that the common stockholders are actually the owners of
the company.

Common Stocks as the Corporate Security

Normally, all corporation issued common stocks. Some corporation dont issue their common
stock because either they are too small or they are family controlled. We will only discussed
about the stocks which are publically trade issues.

Publically Trade Issues

Shares of stocks that are readily open to the general public and are bought and sold in open
market.

When a company issues new securities, there are many different ways which they use but the
most common way is public offering.

Public Offering
An offering to sell to the investing public a set number of shares of a firm stock at specified
price.

Right Offering

An offering of a new issue of stock to current stock holders, who may purchase new share in
proportion to their current ownership position.

Stock Spin-Offs

Stock spin-offs involve conversion of one of firm's businesses to a stand-alone company by

Stock Splits

A stock split occurs when a firm announces its intention to increase the number of shares of
stock outstanding by exchanging a specified number of new shares for each outstanding share
of stock.

Most stock splits are effected with a view to lowering the price of the stock and enhancing its
trading demand. If the stock split is not accompanied by an increase in the level of dividends,
stock prices will fall to account for the split.

Treasury Stock

These are simply shares of common stock that have been issued and afterwards repurchased by
the issuing firm. This is generally done because the firm views the stock as an attractive
investment; perhaps the price is unusually low. Most treasury stock are later reissued by the
firm and used for such purposes as mergers and acquisitions, employee stock option plans, or
for payment of stock dividends.

Classified Common Stock

Common stock issued by the company in different classes, each of which offers different
privileges and benefits to its holders.

Common Stock Values

There are different ways to check the worth of the common stock. These are par value, book
value, market value and investment value.

Par Value
It is defined as the stated value or face value of the common stock.

Book Value

Book value shows the amount of stock holders equity in the firm. It indicates that how much
investor had invested in the firm. Book value is equals to the amount of firms asset minus the
firms liabilities and preferred stock.

Market Value

Market value is the easiest way to check the value of the stock. It is simply normal market price
of an issue. We can also get it by multiplying market price of the stock and the number of
shares outstanding.

Investment Value

It is one of the most significant amount for a stock holder. It shows what value investors placed
on the stock. Investment value is based on the expectations of the risk and return patterns of a
stock. The returns come from dividends and capital gains, and the risk is based on the exposure
to holding the stock.

Common Stock Dividends

Dividend Decision

The board of directors decided that how much to pay in dividends. The directors evaluate the
firm's operating results and financial conditions to determine whether dividends should be paid
and, if so, in what amount.

Corporate Versus Market Factors

During a Board of Directors meeting, a variety of factors are considered in making the
investment decision. These include

The board look at the firms current earnings or profits are considered a vital link in the
dividend decision.
The board look at the firm growth prospects.
The Board also considers the firm's cash position to make sure it has sufficient liquidity
to meet a cash dividend of a given size.
 The Board also ensures that it is meeting all legal and contractual constraints that might
be imposed by loans.
The Board also makes an effort to meet the dividend expectations of its shareholders;
failure to meet these expectations can lead to disastrous results in the stock market.

Some Important Dates

Date of Record

The date on which the investor must be a registered share holder to be entitled to receive a
dividend.

Payment Date

The actual date on which the company will mail dividend checks to share holder.

Ex-Dividend Date

Three business days up to the date of record which determines whether the investor is an official
share holder and eligible to receive the declared dividend.

Types of dividends

Cash Dividends

Cash dividends are simply dividend payments made to the stockholder in cash.

Stock Dividends

A stock dividend simply means that the dividend is paid and additional shares of stock.