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What Are Common Stocks and How to Invest in Them?

Common stocks are a specific type of securities you can invest in. Also known as common, voting, or ordinary shares, they state your ownership of the company’s equity. If you hold common stocks, you have the right to claim your individual share in the organisation’s profit as well as take part in the board of directors’ elections, vote for crucial corporate policies, and participate in other company-related activities.

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In regards to investments, these securities can be a good way to create wealth. However, you need to apply an effective method of valuation of common stocks to value the asset and choose the one that meets your specific investment needs. In this article, we will describe what common stocks are, the difference between preferred stocks vs common stocks as well as the security’s main pros and cons.

How Common Stocks Work

What are common stocks? They represent investor’s ownership in an issuing company. Imagine an organisation that does quite well showing great performance and rapid asset value growth. It means that the value of your common stocks as the share of ownership in this company grows as well, which means increased security value.

Oppositely, a company that is doing quite poorly, cannot guarantee high common stocks value. What’s more, it is likely to come with a decreased value from investor’s perspectives. As a result, we actually have an asset that lets traders share the company’s ups and downs in the long run.

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What Rights Do You Have as a Common Stocks Holder?

First of all, we need to mention there are two major types of common stocks: voting and non-voting. The same company can issue common stocks of both types. For instance, Google A-class shares from the NASDAQ (GOOGL) listing refer to the voting type, while its C-class shares (GOOG) are non-voting.

As for the rights common stockholders have, they include the right to vote for the change in the board of directors, choose corporate directors, vote for stock splits, policy changes, and other corporate events.

How Can I Earn from Common Stocks?

Profits can be distributed in different ways. As a rule, companies use the dividend modal. It means that every stockholder has a specific share of proportional profit to get with a predefined time frame.

Example: Let’s say, you have common stocks of the company with $10 million to be paid in dividends. The company has 20 million shareholders with a proportional share of profit. Each investor will get $0.50 for ever common stock he or she holds

Common Stocks Pros and Cons

On the one hand, this type of security can be the maximum potential profit depending on the method of valuation of common stocks you choose. On the other hand, common shareholders are the last in a queue to make profit when the company does bad. What’s more, common stocks get the lowest priority in case of the issuer’s bankruptcy. In other words, you can get nothing in case of the company’s termination with common stock having zero value. Consider the following pros and cons before selecting this particular type of security for investing.

Pros

  • Stockholders have the right to vote.
  • The common stock value can grow limitlessly.
  • You do not pay taxes unless you sell a stock.

Cons

  • Price can be extremely volatile.
  • Poor company’s performance can lead to zero stock value.
  • Common stocks are the last in line to get dividends after preferred stocks.
  • Minimised priority in case of the company’s bankruptcy or termination.

Preferred Stocks vs Common Stocks

Preferred stocks represent another main type of securities. They differ from common stocks due to a fixed level of dividends that does not change over the time or due to different company’s performance. Preferred stock value is less prone to fluctuation. It all can make you think that these securities are a better option. However, common stocks still have a greater profit potential in the long run.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.