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Common Stock and Investment Banking Process

Common Stock

Common Stock and Investment Banking Process

Common stock shareholders do carry voting rights. However, ownership claims to capital assets follow those of bondholders and preferred shareholders. Meaning principal, interest, and dividends upon bonds and preferred shares must be paid first in the event of bankruptcy.

The share/stock, which is issued to get a dividend in the remaining portion of profit after paying to debentures bonds, preferred stock, is called common stock. It is also called equity share or ordinary share. To ordinary shareholders is the real owner of the company. Equity shares are an important source of long-term capital. It pays an important role in the capital structure. This type of capital is called equity capital. They have voting right, controlling and managing the right of the company. Out of the common stockholder, a few people are chosen as a board member or a board of director. Common stockholders have a direct investment in the company. Some of the definitions, which make clear about common shares, are given below.

Securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder share in a company’s profits via dividend payments of the capital appreciation of the security. Units of ownership of a public corporation with junior status to the claims of secured/unsecured creditors, bondholders and preferred shareholders in the event of a liquidation.

Common Stockholders Base Read

A class of capital stock that has no preference to dividends or any distribution of assets. Common stock usually conveys voting rights and is often termed capital stock if it is the only class of stock that a firm has outstanding (that is, the firm has neither preferred stock nor multiple classes of common stock). Common stockholders are the residual owners of a corporation in that they have a claim to what remains after every other party has been paid. The value of either claim depends on the success of the firm. See also callable common stock, common stock equivalent, putt-able common stock.

A security that represents ownership in a corporation; holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder if a company fails. In case of liquidation, common shareholders get paid after bondholders preferred shareholders and other debentures. In the United Kingdom (UK), common stock is called ordinary shares.

If the company goes bankrupt, the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective shares of the leftover assets. In the event of liquidation, this makes common stock riskier than debt or preferred shares. However, historically, common stock has outperformed bonds and preferred shares in the long-term.

Common stock shareholders do carry voting rights. However, ownership claims to capital assets follow those of bondholders and preferred shareholders. Meaning principal, interest, and dividends upon bonds and preferred shares must be paid first in the event of bankruptcy.

In terms of operations, creditors simply want to be repaid with interest, while employees want to ensure that the company remains a going concern in order to keep their jobs. Of course, owners of common stock seek to maximize their returns on their investment. These distinct goals do not always match up perfectly.

Large corporations feature two tires of equity investors and employees to separate ownership from management for the common of goo. Shareholders vote to elect a board of directors, led by a chairman. In turn, the board hires management, led by the chief executive officer.

Features of Common Stock

Common stock has a number of special features which distinguish it from other securities. The main features of common stocks are as follows:

Par Value: The value is nominal or faces to a value of stock indicated common stock certificate. According.

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Clam on Income: Common stockholders have a residual ownership claim. They have a claim to residual income, which is earning available for common stockholders, after paying expenses, interest charges, taxes, and preference dividend if any.

Claim on assets: Common stockholders also have a residual claim on the company’s assets in the case of liquidation. When a firm is declared bankrupts, it’s assets are sold. Out of the realized value of assets, first the claim of bondholders and then preference shareholders and then preference shareholders are satisfied and the remaining balances, if any, is paid to common shareholders.

Maturity: The common stock has no maturity date. Therefore the company can not redeem in the mind of the life of the organization. The capital raised by the sells of common stock is also called fixed or permanent capital.

Voting Rights: Common stockholders have the right to vote for directors in the election as well as make other major decisions. Common stockholders can attend at the annual general meeting (AGM) and cost vote in person or by proxy. A proxy gives a designated person right to vote on behalf of shareholders at the company’s AGM.

Right to Control: Common stockholders are the real owners of a company, therefore, they have control over the company through the election of the board of directors at an annual general meeting(AGM).

Preemptive Rights: Preemptive right is the right that gives the existing shareholders right to purchase new shares issued by the corporation at a proportion of current ownership and at subscription prices. Preemptive right enables existing shareholders to maintain control over the company.

Limited Liability: Common shareholders are the true owners of the company but their liability is limited to the amount of their investment in shares. If a shareholder has already fully paid issue price of share purchased, he has nothing more to contribute, in the event of financial distress of liquidation.

Also See: Preferred vs. Common Stock: What’s the Difference?

Authorized, Issued and Outstanding Shares: The corporate charter of a company-specific the number of authorized shares of common stock. The maximum that the company can issue without amending its charter. When the shares of common stock are sold, they become issue shares. All or some portion of shares is purchases and actually held by investors, which are called outstanding shares. The number of outstanding, shares is a stock that has been purchased and held by the firm is called treasury stock. If treasury stock is not given then issue share is equal to outstanding shares.

              Number of oustanding shares = Issues shares - Treasury Stock

Rights and Privileges of Common Stockholders

Common stockholders are real owners of a corporation and such they have certain right and privileges. They are as follows:

Collective Rights of Common Stockholders
  1. To amend the charter with the approval of the appropriate officials in the state of incorporation.
  2. To adopt and amend bylaws.
  3. To elect the directors of the corporation.
  4. To authorize the sales of fixed assets.
  5. To enter into mergers.
  6. To change the amount of authorized common stock.
  7. To issue preferred stock, debenture, bonds, and other securities.

Common Stock

Specific Right to Common Stockholders
  1. The right to vote in the manner prescribed by the charter.
  2. The right to sell their stock certificates and this way to transfer their ownership interest to other persons.
  3. The right to inspect corporate books.
  4. The right to share residual assets of the corporation on dissolution.
Preemptive Right

The existing shareholder will get a chance to buy additional shares of the company’s stock before any outsiders.

Also See: What is a Common Stock?
Liquidation Rights

In the case of the company liquidation, the common stockholders have right over residual earning and assets of their corporation.

Rights to Income and Distribution of Additional Shares

Common stock has no legal right to received income distribution from the corporation. However, the board of directors many declare a cash dividend and a stock dividend to a stockholder.

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Right to Control

Common stockholder has the right to vote in company affairs. In most common stock each stock, the holder can cast one vote for one share. The level of control is determined company’s rule, No of share, voting procedures of No. of representative coordinators.

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