Stock markets give investors the opportunity to buy common stock for any listed company. Common stock is one of the types of securities investments that allows an individual to take a small stake in a company and enjoy the benefits of its success. Although investors can sell stock at a gain and aren't liable for corporate actions, they are not necessarily entitled to dividends or voting rights and may not recoup their investment if the company fails. Take a look at the different characteristics of common stock to learn more as an investor.
Consider also: Difference Between Stocks, Bonds & Commodities
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Buying and Selling Common Stock
The U.S. Securities and Exchange Commission notes that there are four ways that individuals normally buy common stock. Some companies allow you to buy and sell stock directly through them on a daily, weekly or monthly basis. This is referred to as a direct stock plan. You also can participate in a dividend reinvestment plan, which allows you to use the dividends you receive from the company to buy more stock.
Brokers, such as Charles Schwab and Scottrade, will buy and sell common stock for you on a U.S. stock exchange. If you purchase a mutual fund, the fund administrator will buy and sell different common stock on your behalf.
Benefits of Dividends and Gains
Since common stockholders own a part of a company, they benefit when the company is profitable. Common stockholders have the right to receive dividends if the Board of Directors elects to declare them. Even if a company doesn't pay dividends to common stockholders, stockholders still benefit when the company does well. When the company performs well, the stock price increases, which gives the stockholder the ability to sell the stock for more than he paid for it.
For example, if a common stockholder buys a stock when it costs $10 a share and it appreciates in value to $15 a share, he's earned a $5 return on his investment. When a stockholder sells common stock for more than he paid for it, it's considered to be a capital gain and is taxed at more favorable tax rates compared to other types of income.
Voting Privileges for Stockholders
As a partial owner, common stockholders have the ability to weigh in on certain company issues. It's unlikely that many common stockholders will get a say in day-to-day operating decisions, but they can vote at annual general meetings. Voting rights is one of the popular features of common stock, but a company can choose to issue common stock that has no voting rights or less voting rights compared to other classes of stock.
Consider also: 5 Important Facts About Stocks
Bankruptcy and Liquidation Implications
Another one of the characteristics of common stock is that, compared to other stakeholders, common stockholders are unlikely to receive any compensation when a company goes under. If a company liquidates and has any remaining assets, it first must use them to pay off debt holders, like lenders and bondholders. After that, it will pay back preferred stockholders for their investment. Preferred stock is a type of stock that typically doesn't have voting rights, receives set dividends and trades at a different price than common stock.
If anything is left over, common stockholders are entitled to a proportional share of the assets, not to exceed their investment in the company.
Liability Features of Common Stock
Common stock is issued by corporations, which offer limited liability to their owners. This limited liability means that a common stockholder can't lose more than her investment in the company. For example, if a corporation liquidates and can't repay a debt, the common stock holder may not be able to recoup his initial investment in the company, but the lender can't come after the common stockholder's personal assets to fulfill the debt.
Consider also: Advantages and Disadvantages of Investing in Stocks