Common Stock

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What is Common Stock?

Common stock is the standard form of shares issued by a company to provide a shareholder with rights and a share of ownership within a corporation. Individuals who hold common stock within a company are eligible to vote on policies as well as the board of directors within the company.

Over the long term, this type of stock can provide high rates of return for investors however it is not without risks associated with liquidation of the company, or other loss of value after the investment is made.

Here is an article about what common stock is.

Difference Between Common Stock and Preferred Stock

There are two different types of stock that may be issued by a company. These include common stock and preferred stock. Where common stock is the most prevalent, preferred stock can afford the greatest level of security for investors. In fact, there are a number of differences between the two.

  • Difference 1. common stock is the standard form of shares for a company
  • Difference 2. common stock affords voting rights to investors
  • Difference 3. Preferred stock earns first dividends during times of high profits
  • Difference 4. preferred stock earns first payouts when companies are liquidated
  • Difference 5. preferred stock is less likely to appreciate in value
  • Difference 6. preferred stock represents a safer investment
  • Difference 7. preferred stock may be callable by the issuer

Here is an article about the difference between common stock and preferred stock.

Types of Common Stock

When we talk about stock often the discussion is about common or preferred stock. However, there are classifications within these types of stock. Specifically, there are several types of common stock to be considered. These include:

  • Growth stocks
  • Value stocks
  • Small-cap stocks
  • Large-cap stocks

Growth Stocks

These stocks are those within a company that is expected to grow at a much higher rate than the average. Growth stocks typically do not offer dividends but do offer a higher potential return through capital gains when they are sold. Instead of dividends, the company reinvests all profits back into the company, which allows for increased growth.

These types of stocks will often appear to be more expensive, however the idea is to be able to get in ‘on the ground floor’ of the investment and to realize a much greater return later. However, these stocks can also represent a significant amount of risk and a loss if the company does not grow as anticipated.

Value Stocks

Value stocks are those that appear to be exactly that, a value. They appear to be trading at a much lower cost than should be seen based on fundamentals that might include earnings, sales, and dividends. They often appear to be a very good investment.

These stocks are generally lower because the company is not seen as being a favorable option. The stocks, as a result, have a higher dividend yield as well as a low P/E and P/B ratio. These can be considered risky because of the potential for the market to continue to view them unfavorably but can also have a higher return.

Small-Cap Stocks

Small-cap stocks are those that are issued by a company that is public but has a low market value of approximately $300 million to $2 billion. These stocks are typically for younger companies, which can make them appealing to investors.

Investors who want to jump into an investment with a company that could have great growth potential may choose small-cap stocks. These companies offer good potential for investment and could be great growth opportunities with a high yield.

Companies that are considered small-cap can be a higher risk as well because there is more potential for volatility. With a smaller size there is more chance that volatility will be too much for the company as well.

Large-Cap Stocks

Large-cap stocks are those that have a high market capitalization. They are upwards of $10 billion generally (though these numbers can vary). They also tend to have less growth potential. At least, there is less aggressive growth potential, but higher levels of stability and even the potential for higher dividends than other stocks.

Investors who are looking for less volatility and risk may choose to enter into large-cap stocks. They may be greatly impacted by the economic climate of the time, which could lead to large losses but less potential for large gains.

Here is an article about different types of common stock.

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Shareholders and Common Stock

When you talk about stock and shareholders you’re generally talking about common stock. This is the type of stock that most people purchase when they choose to invest in a company. It allows them to gain a level of ownership within the company.

Shareholders, in general, are individuals or companies that own at least one ‘share’ or piece of stock for a company. These shareholders may also purchase many stocks or shares and through this can gain a larger ownership share within the company.

The more shares the larger the ownership stake and the more say and control that shareholder has over decisions that are made by the company. Even a single share can provide a shareholder with the right to vote for corporate issues and the board of directors as well as earning dividends.

Here is an article about shareholders and common stock.

What is a Common Stock Purchase?

A common stock purchase occurs when an individual chooses to purchase one or more shares within a company. This can be done through a broker or directly from the company.

Purchasing stock through a broker can be a relatively simple process:

  1. Choose your broker. Consider things like their reputation, how you can get in touch with them, how much the fees are, and the types of stocks available.
  2. Open your account. Once you’ve chosen a broker, you’re ready to open a account with them, which just means filling out the paperwork and an application.
  3. Place your order. Once you’ve got your account you can place an order for the specific stocks that you want. You can choose the name of the company you want to buy from or you can scan through available stocks.

The other option is to purchase from the company.

  1. Navigate to the investor relations page for the specific company you would like to invest in. They should have information about how to invest and how to purchase stocks. This usually involves signing up through a website and then making a direct order.
  2. Create your account. You’ll need to create an account in order to make a purchase but the website should walk you through the entire process.
  3. Place your order. You’re ready to place an order as soon as you’ve created your account. You can select the number of shares you want and then submit the order the way you want.

Here is an article about common stock purchases.

Terms in a Common Stock Purchase Agreement

A stock purchase agreement for common stock has several terms but commonly includes:

  • Date of transaction
  • Number of stock certificates
  • Name of corporation issuing stock
  • Purchase and sale endorsements
  • Price per share
  • Representations/warranties of the seller
  • Representation and warranties of purchaser
  • Agreement clause
  • Statement of government compliance
  • Witnesses
  • Amount and payment of purchase price

Here is an article about the different terms in a common stock purchase agreement.

Taxes and Common Stock

Common stock comes with a range of different tax obligations, which include:

Gains

Stocks that are sold for higher than what is paid for them are considered a capital gain and you’ll be required to pay capital gains taxes on your tax return. This only occurs if you actually sell the share and receive those gains.

Long-term/short-term

Stocks that you hold for a long period of time will have a different tax base than those you only hold for a short-term. If you own shares for one year or less you will owe short-term capital gains, which will be a different tax rate (much higher) than those you earn on shares you’ve held longer than a year.

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