Common Stock: Meaning, Types & Benefits

Today, stock investing is one of the most exciting ways to earn money, albeit with some risk. Nonetheless, with easy apps and reputable brokerages, investing in stock is convenient. However easy investing may be, investors are inclined to research stocks. Before doing this, knowing about the stock as a concept is essential. Essentially, there are two kinds of stock: preferred stock and common stock. Knowing about each reveals the implications and advantages you get while investing.  

You may already know that when investors own common stock in any given company, they own shares of the company, and hence, a portion of the company. Common stock reflects your rights of ownership in any firm issuing the stock and permits you to purchase and sell stock on public stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).  

What are common stocks? 

Common stocks are securities that come under the equity instruments category, representing company ownership depending on the amount of shares owned. The stocks may be issued via an initial public offering (IPO) or be bought on any stock exchange. If you own any shares of the common stock of a company, you own a share in the company’s profits. Furthermore, as an owner of common stock, you have specific voting rights, comprising rights to vote on company policies, elect members of the board, and potentially influence the company's trajectory.  

On account of a shareholder’s ownership stake in any company, they may receive dividend payments at certain periods, especially when a given company declares profits. The said company typically distributes dividends to holders of common shares after it disperses dividends to preferred stockholders. In case the company declares bankruptcy and liquidates its assets, creditors, preferred stockholders, and bondholders are given priority in terms of cash disbursements. After this, common stockholders may receive capital from the assets that remain.  

Types of Common Stock 

Learning about the kinds of common stock will aid your investment decisions and permit you to invest in them according to your unique financial situation and objectives: 

1. Value Stocks 

• Qualities: Value stocks are those stocks that are currently undervalued according to the market. As such, they are characterised by low P/E ratios. Examples of value stocks include those from firms like Abbott India and L&T Technology.  

• Focus of Investment: The focus of investment of this kind of common stock is primarily to seek stocks that portray a low current value, trading lower than their true/intrinsic value, and estimating that their prices will rise when the market realises their true value. 

2. Growth Stocks 

• Qualities: These stocks come from corporations that are witnessing a high degree of expansion. Such companies typically reinvest their profits to fund growth-related activities. Examples of such companies are Bajaj Auto and Bank of Baroda.  

• Focus of Investment: The focus of investing in these stocks is reaching the goal of capital appreciation, predicting that these stocks will grow substantially over a long period.  

3. Small-cap Stocks 

• Qualities: Small-cap common shares in India are those stocks of firms with a market capitalisation of less than ₹5,000 crores. However, Small-cap Stocks are generally touted to have the potential for high growth. Examples of businesses with such stock include Bajaj Steel Industries and Remus Pharma.  

• Focus of Investment: The aim of investment is significant growth, although with higher risk but positive returns.  

4. Mid-cap Stocks 

• Qualities: Mid-cap stocks are companies that have a market capitalisation of ₹5,000 to ₹20,000 crores. Examples of Indian companies comprise Just Dial and Castrol India.  

• Focus of Investment: Here, investment takes a balanced approach with a concentration on stability and the potential for growth.  

5. Large-cap Stocks

• Qualities: Large-Cap Stocks are common stocks that well-established corporations yield. Companies with a market capitalisation of ₹20,000 crores and more, fall in this category. Examples of these behemoths with robust fundamentals include Cipla Limited and Tata Consultancy Services.  

• Focus of Investment: Stocks from these companies give investors a combination of relatively low risk, dividend payments, and stability over the long run.  

Why are common stocks issued? 

As an investor allocating your capital to common stock, you may find that common stocks and uncommon profits go hand in hand. This is especially so when you invest in small companies, like startups, that witness sudden and rapid growth. However, before you can potentially experience this, you should know why companies issue common stocks in the first place. Here are some reasons:  

• To Raise Capital: The key reason that companies issue common stock is to raise money for various purposes like research and development, reduction of debt, expanding the business, and other operational purposes.  

• To Transfer Ownership: Companies are permitted to transfer their ownership excluding any transfer of their physical assets. Such actions are especially relevant in the event of selling a part of the firm or planning succession.  

• To Provide Liquidity: Common shares issued to existing investors/ shareholders offer them liquidity, permitting them to purchase and sell their stock easily.  

Key Features of Common Stocks 

Grasping the features of common stocks aid you in your investment decisions. Here are key features you should consider: 

• Ownership/Rights: Common stockholders have company ownership rights and they can avail dividends and have voting privileges. According to the common stock held, shareholders may have the right to vote on certain company decisions related to elections to the board and the business.  

• Dividend Payments: Holders of common stock may receive dividend payouts from time to time, although these are distributed at the discretion of the company according to their profits.  

• Claims: In the case of liquidation or bankruptcy of a company, holders of common stock possess a residual claim on the assets of the corporation. However, common stockholders stand behind preferred shareholders and bondholders in terms of settlement priorities.  

Benefits of Investing in Common Stocks 

Investment in common stock can be beneficial to investors in the following ways:  

• High Return Potential: If you look at stock investment from a historical perspective, common stock has generated higher gains relative to other financial instruments like traditional fixed deposits and savings bank accounts. Additionally, common stocks yield dividends from their surplus capital or excess profits as companies generating them do not have to interest on capital. 

• Investors’ Ownership/Rights to Vote: The ownership of common stock permits investors to partake in the success stories of different companies from various sectors. Furthermore, when the company of which investors own common shares is profitable, the investor gains a part of the profits too, in the form of dividends and capital appreciation as the value of shares owned increases over periods. Furthermore, some common stock gives investors the power to vote in a company’s affairs and partake in electing company management.  

• Liquidity Advantage: The purchase and sale of publicly traded common shares are easy on various stock exchanges. This feature of liquidity is appealing to investors who can exit their investments to make profits or purchase more shares in the hope they will grow further. In case stocks are doing potentially poorly, on the other hand, investors may end their investment and redeem their capital to invest in other potentially lucrative stocks.  

• No Legal Liability: The good part about common stocks and uncommon profits is that you get to invest in companies easily and may likely gain returns when you least expect it. Companies may flourish and grow faster than estimated, but this is a winning outcome for common stockholders. With such perks, you have no liability concerning the company and its finances or other company operations. Also, you only have shares in the company and no involvement in any of its obligations like those concerning debt.  

Limitations of Common Stocks 

While the ownership of common stock can be fruitful for investors’ portfolios, leading to diversification, there are some limitations to its holding, listed below:  

• Stock Volatility: Common stock tends to face the brunt of market volatility, especially with dynamic price fluctuations in the short run. Furthermore, the valuation of common stock may fluctuate and this makes its assessment challenging. Consequently, any potential returns from common stock may not be assured. Moreover, with common stock, dividends may not be guaranteed as they may be released only when the company makes substantial profits.  

• Limited Control: As an investor of common stock, you have restrictions on the profits of your investment, as this is solely dependent on how the company operates and its policies aimed at making profits.  

Who should consider investing in common stocks? 

Every kind of stock investment may not suit every investor, and common stock may match those who:  

• Have a high tolerance for risk and market volatility 

• Have an investment horizon that is a long-term duration 

• Seek high returns relative to conventional investment avenues 

• Want to grow wealth over long periods via capital appreciation 

• Have an investment strategy of diversification and wish to invest in an array of industries/sectors 

Conclusion 

The role of common stock is significant in the investing environment. Common stock offers you the potential for high gains plus additional income through company dividends. Nonetheless, as they offer high rewards, they also generate higher risk relative to other assets and securities. Grasping the different types, nuances, and characteristics permits investors to understand these kinds of stocks in-depth and make potentially valuable investment choices.  

If you wish to invest in common stock, the first step would be to assess your goals, risk tolerance, and strategies for investment. Then you can seek a reputable broker and start identifying the stock you wish to buy. You may do some due diligence and research on the companies you wish to invest in so that you may mitigate your risk as much as possible.