Common stock features are the characteristics that differentiate them from other stock types. Most companies that issue common stock do so as a means of raising capital for expansion, acquiring another company, paying off debts, or purchasing tangible assets such as land, equipment, building, etc.
Depending on how many times a company issues common stock, they differentiate each stock issue by designating a class to it. For example, the first common shares that have been issued will be designated Class A, subsequent ones will be Class B, Class C, and so on.
Common shares are usually issued through any of the following ways:
- Stock launch: When a private company decides to go public by offering its shares for sale for the first time. It is also known as an initial public offering (IPO)
- Stock-based compensation (SBC): When instead of cash payment, a company issues common shares to its employees in place of salaries, bonuses, or other work compensations.
- An original capital infusion: When a startup or a distressed company issues common shares in order to get funding from investors to grow or salvage it.
- Stock dividends: When companies pay their debtors using common stock instead of cash.
- Settlement of equity-linked instruments: When a company issues common shares that have a low dividend rate.
We will have a look at common stock features, examples, pros, and cons. But before then, let us understand what common stock is.
What is common stock?
Common stock is a type of stock that represents ownership in a company. Unlike preferred stock which is a mixed instrument that acts as both equity and debt, common stock is only equity which makes it a single instrument.
Common stocks are equity security in that they are considered financial assets. They are issued by companies as a means of raising money from individuals which they can use to further their business, think of it like crowdfunding for the business. They are considered a source of long-term capital for a business since they typically have no maturity date and are typically issued through an initial public offering (IPO) even though there are other means of issuing them.
Generally, companies have a limited amount of common stock they can issue, this is known as the authorized stock. When shares of a company are sold, they are known as issued shares. All issued stocks that are purchased by investors are known as outstanding shares or shares outstanding. In an event where the issuing company decides to buy back some of its outstanding shares, these shares become known as treasury stocks.
Investors seeking to invest in a company can do so by purchasing the company’s shares. When investors buy common stocks, they gain partial ownership in the company and get paid dividends too. They also have voting rights; depending on the number of shares they own as one share is typically equivalent to one vote.
Common stock is also known as ordinary shares or voting shares.
Common stock features
- The first option for buy rights.
- No maturity date.
- Voting rights.
- Face value.
- Limited liability.
- Claim on assets and income.
- Ownership in the company.
As the name implies, the first option to buy rights meant that common stockholders of a company have the first option to buy shares of that company. By this right, the company in which they own shares is obligated to offer any new shares they want to sell to their already existing shareholders first before they can offer them to the public. This is often done so as to maintain the stock price as well as prevent stock dilution that is, maintaining the existing shareholders’ ownership percentage. The first buy right is also known as preemptive right or subscription right or subscription privilege.
Ownership in the company
One of the prominent features of common stock is that its stockholders can vote on a company’s operational and administrative decisions and can also request and be granted access to its list of shareholders, financial records, and all other operational records. As a result of these, they are said to have ownership in the company in which they own stocks.
No maturity date
Common stocks have no maturity date, this means that for as long as the company that issues it is in business, the common stock is also valid. This is one of the common stock features that makes both businesses and investors like common shares. For businesses, it means they have permanent access to the funds raised through the sales of common stock. For investors, it means they have a long-term source of income through the dividends they get paid.
Owners of common stock have voting rights in the company whose shares they own. With this right, they are part of the decision-making process of the company when it comes to voting on issues concerning the company’s operation and administration such as voting directors, board members, compensation plans, acquisitions, bylaws amendments, etc. Typically, one share is equivalent to one vote.
Another common stock feature is its face value or par value. This is the price for a single share of common stock. All common stock issued by a company has a particular par value at which they are sold or bought.
Even though holders of common stock have ownership in the company in which they have stocks, their liability is limited because their personal assets are not at risk when the company in which they have stocks goes bankrupt or liquidates. The only risk common stockholders have is losing their initial investment.
Claim on assets and income
An additional feature of common stock is that its holders have a claim on the assets during liquidation and on income in form of dividends. It should however be known that their right to both assets and income is residual because preferred shareholders, bondholders, and debtors have a higher claim and thus have to be settled first before common stockholders.
Common stock examples of popular companies
|Common stock price ($)||Company|
|83.14||Exxon Mobil Corp|
|92.83||CVS Health Corp|
|11.39||Ford Motor Company|
|502.43||United Health Group|
|108.00||JPMorgan Chase and Co.|
|412,600.00||Berkshire Hathaway Inc.|
|41.94||Capri Holdings Ltd|
|36.86||Walgreens Boots Alliance Inc|
|51.21||Restaurant Brands International Inc|
Pros and cons of common stock
Common stocks have some characteristics that are an advantage to their holders and some that are a disadvantage. Below, we shall have a brief look at some of these pros and cons.
Pros of common stock
- Voting rights
- Perpetual income source
- Preemptive rights
Common stockholders can vote on issues of operations and management in the company in which they have stocks.
Perpetual income source
Common stocks have no maturity date, this means that their holders can receive dividend payments for as long as the company that issued them is in business. These dividends are paid either monthly, quarterly, or annually depending on the company that issued them.
Considering that common stocks are traded on the stock exchange daily, it makes them liquid. This means that they can be easily sold by their owners whenever they choose.
Common shareholders have the right to be the first to get offered subsequent shares of the company before the company sells the shares publicly.
When compared to bondholders, common stockholders have a higher profit margin because they get paid dividends for as long as they have the shares and the company is in business. They also make capital gains; the profit they make when their stock appreciates in price as at the time they decide to sell it.
Cons of common stock
- Residual claim on assets in liquidation
- Residual dividends payment
- Price volatility
Residual claim on assets in liquidation
Even though holders of common stock have a claim on a company’s assets in case of liquidation, their claim is residual and they only get assets if there are leftovers after preferred shareholders, bondholders and other creditors have received assets.
Residual dividends payment
Although common stocks serve as a source of perpetual income, dividends are not assured and are not cumulative. They also only get paid after bondholders and preferred stockholders have received their dividends payments in full.
Common stocks trade on the stock exchange, which means that their price is highly influenced by market forces of demand and supply. The issuing company’s performance can also affect its price either positively or negatively.
FAQs on common stock features
Do common stocks have types?
Common stocks do not have types, they have classes instead. Companies that issue more than one common share differentiate these stocks by classes such as Class A, Class B, etc. with each common share class having features that differentiate it from the other classes.
How are common shares issued?
Common shares can be issued through:
1. An initial public offering (IPO)
2. Issuance of stock-based compensation.
3. An original capital infusion.
4. Stock dividends.
4. Settlement of equity-linked instruments.
The features of common stocks make them a good investment option for most people. The fact that it is can undergo capital gains and is also easily sold make it attractive to a lot of investors. However, like all other investment options, it has its downsides too. Therefore, anyone wanting to investest in common stock should also consider its pros and cons before making a decision.Last Updated on August 16, 2022 by Nansel Nanzip Bongdap