Common Stock

What is common stock?

Common stock is a share of ownership in a business that enables its holder to vote at shareholder meetings and to collect dividends.

Upon payment of all creditors and preferred shareholders, the common stockholders receive their proportionate part of the liquidation profits in the event of corporate dissolution.

When an investor owns the common stock of a company experiencing financial difficulties, this low level of liquidation preference might provide a risk of losing money. However, the majority of the gains flow to common owners when a corporation is profitable.

In many places, the law mandates that each share of common stock be allocated a par value. Technically, par value is the minimum price below which a share of stock cannot be sold. In actuality, par value is typically established at the lowest feasible amount, and in certain places it is not even required by incorporation law. Thus, par value is irrelevant in most circumstances.

In the equity portion of a company’s balance sheet, the dollar amount of common stock recognized by the corporation is listed. The quantity of common stock recorded by a firm is divided between the common stock account and the extra paid-in capital account; the total amount recorded corresponds to the price at which the business sold shares to its investors.

Common Stock

Common Stock Formula

Common shares are shares that may be purchased on the stock market, including those held by institutional investors and business officials (insiders) who own a firm. To calculate common stock, there is a special accounting formula: the number of issued shares minus the number of treasury shares equals the number of outstanding shares of common stock.

Common stock= [Total Equity + Treasury stock]-additional (paid-in) capital-preferred stock-Retained earnings

Common Stock Example

Common shareholders are entitled to specific privileges within the company. According to their share of ownership, they have the opportunity to vote on business affairs and for board members.

Common shareholders also have the right of first refusal to keep their percentage of ownership. For instance, if the firm is attempting to expand its operations by issuing more stock, the one percent owner has the right to purchase extra shares in order to keep his one percent ownership before other investors may acquire it.

The right to earn dividends is one of the several benefits of being a common investor. It is not the right to announce dividends, but the right to receive them when they are declared. Dividends are the distribution to shareholders of retained earnings. It is a return on their investment in the organization. When the board of directors declares dividends, common shareholders have the right to receive a proportion of dividends payable to common stock that corresponds to their ownership stake in the firm.

Features of the Common Shares

  • Stocks Represent Ownership

Common stock represents ownership in a corporation. One share is a fractional ownership stake proportional to the number of outstanding shares. If a corporation issues 100 shares of stock and an investor purchases 10 shares, the investor would control 10 percent of the company. Companies in the real world issue millions, and sometimes billions, of shares. However, each one represents a proportional piece of the company’s stock.

  • Voting Rights

The majority of common stocks have voting rights attached to them. Shareholders elect directors, who then select management accountable for the business’s direction. When a firm is involved in a merger or acquisition, shareholders frequently exercise their voting rights to voice their thoughts on the transactions.

  • Common Share Price

Theoretically, stock prices have no ceiling. In contrast, the value of a company’s stock shares might reach zero, rendering them useless. The dividend payout is one of the appealing features of common stocks. Numerous corporations distribute dividends to investors on a regular basis. This indicates the owner’s portion of earned earnings. In the event that a firm must liquidate or declare bankruptcy, the owners receive whatever is left over after creditors and bondholders are paid.

  • Common Bond Characteristics

The bonds issued by corporations, government agencies, and municipalities reflect loans made by bondholders to a firm or organization. The contract accompanying a bond issuance describes the issuer’s duties to bondholders and the issue’s specific characteristics, such as the interest rate.

  • Transformable and Callable

Some corporate bonds may include a clause allowing the bondholder to exchange the bond for a specific number of shares of the company’s stock. A bond may also be callable, which means that the issuer might require the bondholder to redeem prior to the maturity date.

  • Bond Rates, Maturity and Value

Bond investors do not get dividends in the form of corporate earnings; instead, they receive a coupon rate, which is a set return. Bonds contain an expiration date, also known as the maturity date, which is the day on which the principal is repaid to the investor. The principal is based on the bond’s par, or face value. When estimating future interest rate payments, bond prices are often known beforehand. Nonetheless, bond prices are susceptible to credit risk based on the issuer’s financial health and are influenced by inflation and market interest rates.

Advantages of issuing common stock

  • Performance

Compared to bonds and deposit certificates, the performance of common stocks is superior. However, there is no cap on the investor’s profits from their ownership of common stock. Consequently, common stocks are less costly and more practical alternatives to debt investments.

  • Electoral rights

An investor receives one voting right for each share of common stock held. These voting rights enable investors to participate in the making of company decisions and corporate policy.

In certain instances, investors can elect the board of directors by exercising their voting rights. The more common stock an investor has, the greater influence he will have over a company’s policy.

  • Liquidity

Due to their liquidity characteristics, investors may simply surrender or invest common stocks. Thus, these stocks enable investors to purchase shares and withdraw their whole investment if the firm fails to meet their expectations.

Liquidity gives investors the freedom to use their capital as they see appropriate without difficulty.

  • Limited Legal Liabilities

The responsibility of common shareholders extend beyond the financial investment events that occur within the corporation, and they must be concerned with all legal liabilities.

When a corporation provides increasing returns over time, ordinary shareholders are in a sense passive beneficiaries of a fixed income.

Passive shareholders are not liable in the event that the firm liquidates or encounters legal issues.


  • Market Risks

The principal risk associated with common stock is market risk. Market risk is the possibility that a firm will underperform over time.

A significant fall in the company’s performance might result in the shareholders consuming the profit and not receiving the dividends they desire.

This is a key criterion to examine since, even when the firm is functioning very well, common shareholders are not the only or first to earn dividends.

  • Uncertainty

Even while ownership of common stock might be considered a fixed-income investment, there is no assurance of dividends. The significant distinction, however, is that the revenue is not guaranteed at the expected time and dependent on the availability of cash in the corporation and how those funds are allocated.

When the corporation begins to distribute dividends, investors and ordinary stockholders are not the only recipients of instant payments.

They get dividends after shareholders and bondholders have received their entire dividend entitlement. Therefore, there is an element of unpredictability and lack of control over the profitability of common stocks.

Frequently Asked Questions

The primary distinction between preferred and common stock is that preferred stock does not grant stockholders voting rights, but common stock does. Preferred shareholders get dividends before regular shareholders because they have preference over a company’s profits.

  1. Preferred stock
  2. Domestic stock
  3. International stocks
  4. Large-cap stocks
  5. Mid-cap stocks
  6. Small-cap stocks
  7. Growth stocks

In the event of a firm liquidation, common stock and preferred stock rank below debt holders as creditors who would get assets. Both common stock and preferred stock represent equity ownership. They gain ownership rights in the corporation, including voting and dividends.

Short-term investors who are unable to hold ordinary stock long enough to overcome share price declines may benefit from investing in preferred stock. This is because preferred stock tends to vary less than common stock, but it also has less potential for long-term gain.

    Read the Latest Market Journal

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 32 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 52 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 92 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 172 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 93 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 124 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Why 2024 Offers A Small Window of Opportunity and How to Position Yourself to Capture It

    Published on Mar 28, 2024 171 

    With the Federal Reserve (FED) finally indicating rate cuts in 2024, we witnessed a significant...

    Weekly Updates 25/3/24 – 29/3/24

    Published on Mar 25, 2024 75 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066