Successful investment in stock market requires an understanding of the different characteristics and features of the stocks. It is important to learn some basic knowledge about what common stocks is, how many types of stocks have, what causes stock prices to change and many more.
Basically there are two types of stocks: common stocks and preference stocks. In this topic we will focus on the features and rights associated with holding common stocks.
Common stocks are the most common form of stocks an investor will encounter in the financial market. It represents a certificate of ownership of a company. Following are the five most important features associated with common stocks:
(1) Limited Liability
Common stockholders have limited liability, in other words, their liability is limited to those stocks or shares. They cannot be forced to pay anything out of their own money in the event of bankruptcy. They are fully protected against any financial obligations incurred by the organizations.
(2) Liquidation Rights
If a company goes bankrupt and liquidates all its assets, the common stockholders have the right to receive their share of sale proceeds. However they are the last to receive money after the creditors, bondholders and preference stockholders are paid.
(3) Preemptive Rights
If a company plans to issue new shares, existing stockholders have the rights to subscribe to new stocks, often at lower prices, before they are issued to the public.
(4) Voting Rights
Common stockholders have the rights to vote in general meeting of the company. Each stock carries the right to one vote. Stockholders can exercise control by electing the board members, who will oversee the major decisions and policies implemented by the management.
(5) Dividend Payments
Common stockholders are entitled to a share of the profits in the form of dividend. However the amount of dividend payments is not based on a fixed percentage rate, it is recommended and decided by the board of directors.
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The author holds an MBA from Heriot-Watt University (UK) and a BCom degree from The University of Adelaide (Australia).