Common stock is a type of security that represents the ownership of equity in a company, it generally conveys voting rights and is also known as capital stock to the only class of stock that a firm has outstanding. The type of stock that is present at every corporation, whereas common stockholders are at the bottom in the priority list when it comes to the ownership structure at the event of liquidation, common shareholders, preference shareholders, and other debenture holders when they are paid in full. In simple terms, we can say those common stocks allow a shareholder to vote on corporate issues.
Is common stock is an asset?
Common stock is referred to as an asset for the shareholders. Comparing to any other asset the owner receives the payment when it is actually sold. Common stock in the company’s balance sheet is always listed as an asset with the par value. The difference between the par and the par value and the amount received under Initial Public Offering is capital surplus.
Saying that common stock is classified in many terms is wrong, as no classification is required for common stock. Therefore, some companies issue two types of common stock but in most companies they issue one as voting shares and other as non-voting shares. The classification is done just to preserve control over the company. Moreover, different classes of common stock enjoy the same right from the company’s profits, this can be the main reason those common stocks do not have any unifies classification.
Why Company Issues Stock?
Company firstly issue the stocks at an initial public offering and before that company is privately held. The company handles its finances through bonds, corporate profits, and private equity investors. There is a reason behind when the company goes for Initial Public Offering, the company wants to expand the business and needs a massive amount of capital that can be received through Initial public offering. Companies do offer stock options to their early employees which they serve as an incentive to invite them on board; the reason behind the stock option is many of the start-up company doesn’t have much cash flow to pay the skilled employees. The last and the main reason the company goes for an initial public offer to allow owners for changing the financial portfolio is quite risky for the owners as they have all their personal finances tied up with a company.
Investing in Stocks
Stocks are the first priority for any of the investor’s portfolio, this has a huge amount of risk as when it is compared to preferred stocks and bonds. Well! If they bear the greater risk then they also enjoy the greater potential of reward. There are many stocks that benefit the company in different ways like growth stock in the company increases in value to grow the earning. Value stocks are generally lower in price in relation to their fundamentals. Value stocks, therefore, offer a dividend as compared to the growth stock. Stocks are categorized by market capitalization whether small, medium, and large.
Common Stock VS Preferred Stock
Other than the common stock the type of stock is preferred stock. The difference between them is they preferred stock does not have any voting rights. Preferred Stock also a fixed percentage of dividend that does not change. The first preference is given to the preference shareholders then the company decides how much to pay to the common stockholders as a dividend.
In case the company is winding up or being restructured in the bankruptcy, the assets firstly are distributed to the bondholders than to preferred stockholders and lastly to the common stockholders. In most of cases, the common stockholders are paid less to others or they receive nothing.