What are common stocks?
Common shares, synonymous with common shares, represent the basic voting shares of a company. Common shareholders are generally entitled to one vote per share and receive dividends only at the discretion of the management of the company.
Understanding common stocks
An ordinary share represents the participation in the capital of a company in proportion to all the other ordinary shareholders, according to their percentage of participation in the company. All the additional shares of a company’s shares are, by definition, preferred shares. Ordinary shares must be issued by all companies, as defined in their articles of association, companies having to issue at least one ordinary share to a shareholder. In other words, someone must be the owner of the company.
Key points to remember
- Common shares give investors the right to vote (one vote per share) and represent the proportional ownership of a business.
- Common shareholders receive fluctuating dividends based on the performance of a business.
- Ordinary shareholders receive their dividend after the preferred shareholders.
- Market forces, the value of the underlying activity, and investor sentiment determine the market value that investors pay for common stocks.
Rights and obligations of ordinary shareholders
Ordinary shareholders are entitled to the residual profits of a company. In other words, they are entitled to receive dividends, if any, after the company has paid dividends on the preferred shares. They are also entitled to their share of the residual economic value of the enterprise in the event of the liquidation of the enterprise; however, they are in last place after bond holders and preferred shareholders for having received the company’s proceeds. As such, ordinary shareholders are considered unsecured creditors.
Although common shareholders are at greater financial risk than the creditors and preferred shareholders of a company, they can also reap greater rewards. If a business makes big profits, creditors and preferred shareholders do not receive more than the fixed amounts to which they are entitled, while ordinary shareholders share the big profits. The same thing happens when businesses, such as start-ups, are sold to larger companies. Common shareholders generally benefit the most.
The only obligation of an ordinary shareholder is to pay the share price to the company when it is issued. In addition to the shareholder’s right to residual profits, he has the right to vote for the members of the company’s board of directors (although certain preferred shareholders may also vote) and to receive and approve the annual financial statements of the society.
Value of common shares
Common shares include those that are traded privately as well as shares that trade on various public exchanges. In many jurisdictions, common shares have a declared “face value”, but this value is more technical and rarely exceeds a few cents per share. Market forces, the value of the underlying activity, and investor sentiment toward the business determine the market value that investors pay for common stocks. A famous example of this is Berkshire Hathaway Inc. (BRK.A), whose Class A common shares have a par value of $ 5 but have been trading above $ 300,000 on the New York Stock Exchange (NYSE) since May 2019.
Example of common shares in the real world
Apple Inc. (AAPL) has issued 4,715,280,000 common shares which pay an annual dividend of 1.62%, according to Nasdaq.com. Suppose an institutional investor owns 300 million common shares in the tech giant. This means that they own 6.4% of the company (300,000,000 / 4,715,280,000) and receive an annual dividend of $ 918,540,000 (56,700,000,000 x 1 1.62%). Common shares also give the investor a weighted 6.4% vote on matters submitted to shareholders of the company, as one share equals one vote.