Common Stock

A security that is used to represent ownership in a corporation is known as common stock. It represents equity ownership in a corporation, provides voting rights and entitles the holder to a share of company’s success with dividends and capital appreciation. It is easily to distinguish it from preferred stock. Investors of common stock receive their funds in the case of bankruptcy after preferred stock holders, bond holders and creditors. When compared to preferred shares overtime, common stocks perform better. Common stock is voting share, not always. Through votes on establishing corporate objectives and policy, common stock holders influence the corporation. There won’t be any fixed dividend paid out to common stock holders. The returns for common stock holders are not certain or fixed. Dividends and capital appreciation are additional benefits from common stock.

Equity

The residual claim or interest of the most junior class of investors after all liabilities is known as equity. If liability is greater than asset then it is called negative equity. The interest in assets of a company hold by individual shareholders of common stock or preferred stock is termed as shareholders equity. For the purpose of starting business, owners invest some amount on it and it can cause liability to the owner. Ownership equity will be paid only after paying to all other creditors. Ownership equity is also known as risk capital or liable capital.

Security

Security is a financial instrument used to represent financial value. Securities can be classified into debt securities and equity securities. Banknotes, bonds and debentures are examples for debt securities. Common stocks, derivatives like forwards, futures, options and swaps are equity securities. The unit that issues security is known as issuer. The regulatory structure of a country determines the qualifications for securities. Investors in securities will be retail sometimes.

Preferred stock

A preferred stock is a special equity security which shows the properties of both equity and debt instrument. It is also called as preferred shares, preference shares and preferreds. Preferred stock is generally considered as a hybrid instrument. When compared to common stock it is higher ranking. But preferred shares are subordinate to bonds. These stocks do not carry any voting rights. It can carry a dividend and have priority over common stock in the payment of dividends and upon liquidation. Terms related to preferred stock are generally mentioned in a ‘Certificate of Designation’. Many major credit rating companies rate preferred stocks.

Questions:

• Define common stock?
• What is meant by equity?