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What is Common Stock?

Common stock refers to a security that represents ownership in a company. All too often, holders of common stock have the ability to exercise control through electing an experienced board of directors as well as voting on corporate policy. Holders of common stock are usually on the bottom of the ladder of priority when it comes to ownership structure. In the case of liquidation, common stakeholders have the right to a corporations assets. The preferred stakeholders will then be fully paid.

How Does Common Stock Work?

With common stock, if a corporation is declared bankrupt, the shareholders won't receive their money until when the creditors, as well as preferred shareholders, have garnered their shares respectively. This implies that common stocks are pretty riskier compared to somewhat preferred shares. The upside to these common shares is that they often outperform bonds as well as preferred shares. As such, many companies will issue the three available types of securities. Common shares refer to those shares in a corporation that doesn't provide guaranteed dividends to its investors. The sum of dividend distributions is at the discretion of the management of the company. While investors of common stock may either earn or not earn money based on dividends, they still expect to a rise in the share price as the company expands its operations to increase profits. Stocks will offer higher returns compared to bonds and other investments.

Difference between Common and Preferred Stocks

There are two main types of stocks in the stock industry- common stock and preferred stock. Although they are both referred to as stock, the two operate differently from each other. They also have different potentials for garnering profits. Every stock has a different risk profile that may only be suitable for certain types of investors. Here are the main differences:

Common shares have major political rights. On the other hand, preferred shares dont have the right to vote particularly in meetings.
Preferred shares have an additional right that offers preference to receive the dividends generated by a company while common shares dont have these extra rights.
Preferred shares have a slightly lower level of liquidity compared to common shares.
A company can instantly redeem the preferred shares at any given time. This implies that they can buy the shares at the same price.
Common shares often have a limited liability while preferred shares have greater responsibility.

Advantages of Common Stocks

The administration of capital through various stock shares doesn't compel restrictions on the company. Therefore, the corporation will be allowed to have greater flexibility mainly when it comes to having long-term financing without any problems.
Its pretty advantageous for a company to gain finance through common shares. This implies that the issuance of common capital, unlike preferential capital, doesn't impose major restrictions on debt issuances. This allows a company to uphold flexibility in order to acquire long-term financing.

Disadvantages of Common Stocks

Usually, the total cost of financing is higher than the existing alternatives. One must be careful when it comes to the issuance since the process may entail significant loss which may have a substantial negative impact on the company.
The issuance of more common shares imposes high risks on the loss of the control of the company by the existing owners.

Creditors, as well as the preferred stakeholders, have priority rights over the common shareholders. However, the latter have always assumed the greatest risk in the company. They are also the ones who own a higher needed return on the money they have invested in. The conventional shareholder on the other hand can't lose more than the financial contribution to society. Besides, the assets they own aren't at risk if the said company is experiencing financial difficulties.

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Common Stock - Explained