What is common stock and its different types? How does it differ from preferred stock?

What is common stock and its different types? How does it differ from preferred stock?

15 January 2024 | By INDIE

Common stock is one of the basic instruments available in the equity market. This article provides a detailed overview of common stock - what it is, the different types of common shares issued by companies, how individual investors can participate in stock ownership, and how is it different from preferred stock.

What is common stock?

Common stock refers to shares of ownership in a company. When you buy common stock, you become a partial owner of the company. As a shareholder, you have voting rights and are entitled to a portion of the company's profits in the form of dividends. Common stock broking is considered the most basic form of shareholding. Companies issue common stock as their main security during their initial public offering (IPO). Owning common stock gives you claim over the company's assets and earnings. It also lets you vote on major company decisions like electing board members.

Common shares reflect the value of a company over time. If the company grows and earns more profits, the value of each common share increases accordingly. However, common stock ranks below-preferred shares and debt holders when it comes to claims on assets if the company winds up or declares bankruptcy.

Different types of common stock

There are a few different types of common stock.

The type of common stock issued depends on the company's requirements and founders' vision. In India, voting common stock is most common among listed companies.

How to invest in stocks?

Individual investors can invest in stock by common or preferred shares via two main methods.

Regular investors buy stocks listed on Indian exchanges like BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). IPO allotments can also be done through UPI/banking channels.

Common stock vs Preferred stock

While common stockholders own a company, preferred shareholders have a higher claim on its assets and earnings. Here are the key differences:

Hence, preferred shares offer more security and downside protection while common stock provides greater growth opportunity through share price appreciation. Regular equity investing in solid companies through SIPs and systematic long-term investing is the preferred approach to benefit from stock market growth in India. Understanding factors like business models, management, and industry outlook is crucial before selecting individual stocks. Investors can consider IndusInd Bank’s Indie app for convenient and easy stock investing and trading.

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.