Common Stocks Essay Example

Introduction

Common stock according to (Smart, Gitman, & Joehnk, 2016) is a form of equity ownership and participate in electing the board of directors and the corporate policy of an organization. Another unique aspect of the common stock is that they receive compensation in case of bankruptcy after the bondholders and the creditors are compensated. The common stock is the residual owners which means that their claim in the organization is subordinated to other stakeholders such as lenders and the employees. As such, the common stockholders do not have any guarantee to get back their investment. This report will assess the different features of common stockholders, their value, dividends, their investment appeal, and the different types of common stock based on Smart et al., (2016).

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Investment Appeal of Common Stock

The appeal of the common stock to the investors is high which is evidenced by the stable demand for the common stock even during the financial crisis in 2002 and 2008. Common shares are an investment choice for many investors due to the prospect that they increase in value and can be able to generate greater capital gains. Besides, the common stock has a high investment appeal because of dividends which provides the investors an income generating opportunity. When the market is doing well the price appreciation of the common stock increases the investor's gains significantly. However, it is important to note that the common shares fluctuate over time as well as their benefits. The stock returns of the common stocks are dependent on the price behavior and the dividend income (Smart et al., 2016). The decline of the common stock prices can be categorized regarding bear markets and the "routine decline." The bear market is characterized by the falling market prices consistently whereas the routine decline is normal and occurs multiple times a year but inconsistently.

Advantages of Common Stock Ownership

The reasons behind investor's acquisition of common stock vary from one investor to another, but there are common reasons such as the potential capital gain and the dividend income which is periodic. At the same time, the high liquidity of the stock market attracts many investors. In the long term, stocks offer significant returns which draw many, and the common stocks have high yields that compare to the bonds and the Treasury securities. Stocks high returns and the ability to cushion the investors from inflation makes them more favorable compared to the bonds. Lastly, the ease of buying and selling of the common stocks makes them have a greater appeal, and also they provide the investor the freedom of knowing the number of shares they want to buy (Smart et al., 2016).

The Disadvantages of the Common Stock Investment

There is a significant risk of investing in common stocks such as the business and the financial risk, market risk, event risk, and the purchasing power risk. These risks are imminent and cannot be eliminated because the market environment and the economy determine them. Market competition, regulations, and the economy affect the stock prices by altering the firm's sales and profits which determine the return value of the stocks. The most prominent disadvantage of investing in stocks is their volatility (Smart et al., 2016). A company with an excellent future performance potential has a higher return regarding the common stock which is a common approach to making high-value investments in the stock market.

Unique Features of Common Stock

Common stock represents equity in an organization which gives the common stock the name equity capital. The shares provide the shareholders with an equal chance to participate in the organization sharing of dividends and elections. Therefore, the common stockholders own the company and the number of shares that an individual has determined their position in the organization. Lastly, common stock has an indefinite lifespan and does not have a maturity date like bonds (Smart et al., 2016).

Publicly Traded Issues

These are the type of shares that are available to the public, and they are bought and sold at owners discretions. The common stocks are usually issued in public offerings where an organization avails a certain number of its share stock. In addition to the public offering, organizations can issue new shares through the rights offering where the existing shareholders are given opportunity equal to the number of shares owned. In another approach, an organization can use stock spin-off to issue shares by creating a new company from an existing subsidiary and distributing the shares to the shareholders (Smart et al., 2016).

Classified Common Stock and Buying and Selling of Stocks

The classified common stock is a situation where an organization issues different classes of common stock which have distinct privileges. Therefore, in this case, the shares have unique benefits to their specific investors. For instance, an organization can issue Class A and Class B shares and give them different voting rights. In such a case, it is essential for investors to take time to review the privileges and the limitations of each class of stock. The fluctuating stock prices is a critical element in buying and selling of stocks and determine individual security holdings based on the market performance. The common stocks can be sold in around lot which refers to shares above 100 of the stock or an odd lot which refer to shares below 100. Different costs such as taxes, transfer fees, and the brokerage fee are incurred as transaction costs during the buying and selling process (Smart et al., 2016).

The Value of the Common Stocks

The value of the common stock refers to their worth which can be determined in par value, book value, investment value, and the market value. Par value is an arbitrary valuation of the common stock which has no significance, and it is assigned to the stock at the time of issue. The book value has significance to the investors because it refers to the shareholder equity and it is the contribution of capital to an organization which is recorded in the balance sheet. The market value refers to the prevailing price of the common stock which refers to the amount the investors are willing and able to pay at a particular time, and it is used in the trade of stocks. The value of the shares can go below the market value, and most investors seek stocks that are below the stock value because when they appreciate they have higher returns. Lastly, the investment value is the expectations of the investor based on the return of the stock. The return potential of the stock and the risk exposure to the investors helps determine the investment value (Smart et al., 2016).

Dividends of Common Stock

Dividends are the profit share given to the shareholders in form of cash or shares. Dividends can be given annually or quarterly and they are determined by directors upon reviewing the financial condition and operating results of the company. Dividends vary based on the type and the number of shares (Smart et al., 2016).

Conclusion

Common stocks is an equity investment opportunity that is acquired by purchasing a certain number of an organization shares in a public offering, spin-offs, splits and the rights offering. Common stocks can vary depending on the value and the benefits attached to the shares. The investors in common stock are residual owners who receive compensation the last during a bankruptcy. Common stocks attract many investors because they are a source of income through dividends.

Reference

Smart, S. B., Gitman, L. J., & Joehnk, M. D. (2016). Fundamentals of Investing, Global Edition. Harlow, United Kingdom: Pearson Education Limited.