What is common stock?
First of all a stock is a part of a
company. Basically when a company goes public through an IPO they are basically selling part of the company to the interested prospectivee shareholders.
Once you buy common stock like in a company like facebook then you are entitled to a share of the public company’s profits and you will also have voting power in the company issues.
In any public corporation when profits are declared, there is a procedure that if followed in paying dividends to the shareholders and herein lies the major disadvantage of common stock.
Common stock holders can only be paid after all the bondholders, preferred stock holders and debt holders, suppliers (basically everybody else) have been fully paid. This means that the percentage of profit they get is small depending on the company.
other disadvantages of common stocks are
- it is hard for common investor to anticipate the performance of the stock price based on the company’s activities. So a fundamental investor would not really like this stock as they have to analyze the company’s management
-also a lot of information is withheld from them like accounting management and this makes investment decision making difficult and inaccurate
Despite the above the advantages of common stock are;
– first off is their high liquidity. they can be easily sold at a good price making then relatively stable vehicles to keep money
– just like other stocks they have a very high earning potential as compared to other vehicles like bonds and funds
-a common stock holder is entitled to the part of profits directly related to the ratio of the number of stocks he holds to the total number if stocks the company issued. Therefore the more stocks you have the higher the ratio and the higher the returns
Here is more on common stocks
Common stocks are diferent from preffered stock in that preferred stock is more preferred[:)] bacause the dividends are guaranteed unlike common stocks.
Here is a little more on preffered stock. This type of investment will be covered in more detail in the next post
