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.
Voting Stock: This is regular common stock that comes with voting rights. Each share entitles the holder to one vote on major company decisions.
Non-Voting Stock: Some companies issue shares that do not carry voting rights. This is usually done to separate ownership from control of the company.
Class A and Class B Stock: Companies may designate multiple classes of common shares with different voting powers. Class A stock usually has one vote per share while Class B has higher or multiple votes.
Founders' Stock: This stock is given to company founders to retain control. They carry extra voting power than regular shares.
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.
Demat Account: Open a demat account with a depository participant like CDSL or NSDL. This is an electronic account used to hold securities in dematerialized/demat form.
Brokerage Account: Then open a trading account with a stockbroker. This allows you to place buy/sell orders from your internet-enabled device.
Funds and Documents: Deposit funds in your brokerage account and submit KYC documents for verification. You can invest as low as Re. 1 per share depending on the stock price.
Research and Invest: Study company fundamentals, market trends before picking shares. Place online orders during market hours and the broker will execute on your behalf.
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:
Voting Rights: Common shareholders have voting power to elect the board and decide major policies. Preferred holders do not have voting rights.
Dividends: Preferred dividends are fixed while common dividends may fluctuate or not be paid at all depending on profits. Preferred holders must be paid their owed dividends before common shareholders.
Priority on Liquidation: In the event of bankruptcy, preferred shareholders have seniority over common holders. They are paid in full before common stockholders receive any money from remaining assets.
Redemption: Some preferred stock comes with a maturity date after which it must be redeemed by the company at par value. Common shares have no maturity.
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.
