What are the Characteristics of Common Stock?
If you're relatively new to the stock market or thinking about investing in common stocks, you'll want to know about their characteristics and how they differ from other kinds of stock and other types of investments. Thousands of common stocks are bought and sold on many different exchanges every day, and investors have made and lost fortunes trading these securities.The ones who have succeeded have developed a high degree of knowledge about the many features, benefits and risks that are unique to this form of investment.
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Definition
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Common stock is the basic form of ownership of a corporation. All corporations issue common stock, with a specific number of shares authorized for issuance by the board of directors. Each share represents an equal percentage of the ownership of the corporation, and carries with it certain rights and characteristics that are explained below.
Voting Rights
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Common stockholders normally have the right to vote on issues affecting the corporation, with each share entitling the owner to one vote. Typical voting issues include the election of directors, approval of mergers with other corporations and corporate takeovers, changes to corporate bylaws, and other issues as specified in the corporate charter. Voting is done at the corporation's annual meeting, but can also occur at special meetings as determined by the corporation's directors, or though the mail via use of a proxy form.
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Dividends
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Common shareholders also have the right to receive dividends, if and when they are authorized by the corporation's board of directors. Although dividends are not guaranteed, and many corporations do not pay them, all holders of common stock receive the same dividend amount per share when they are authorized. Although there is no fixed schedule for the payment of dividends, most corporations pay them on a quarterly basis. Dividends may be periodically increased, decreased or discontinued depending upon the financial success of the corporation. Dividends are normally paid in cash, although they may also be paid in additional shares of stock.
Merger Consideration
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If and when a corporate merger is approved by shareholders, they have the right to receive financial consideration for the shares they own. Typically they will receive a cash payment for their shares, or in the case of an acquisition of the corporation by another company, they may receive shares in the acquiring company in exchange for the shares they currently own. Normally, shareholders must vote to approve a merger before they receive any such consideration.
Dissolution and Liquidation
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In the event that a corporation is dissolved and/or liquidated, its common shareholders will have final claim on its assets. It's important to note, however, that this claim is secondary to the claims of creditors, bondholders and preferred stockholders. Once these stakeholders have been paid, any amount remaining from the liquidation of corporate assets will be distributed to the holders of its common shares.
Price Volatility
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Investors in common stocks should be aware that they are one of the riskiest types of investments. No return is guaranteed to the shareholder, and the price of common shares may fluctuate greatly, much more so than the price of corporate bonds or preferred stocks. Nevertheless, the common stock of a successful corporation tends to rise significantly over time, and its shareholders are entitled to realize these gains at any time through the sale of their stock.
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