What are Common Stocks?

Are you an investor with equity investments? Or, do you plan to invest in a company’s equity? If you answered yes to any of these questions, you need to have absolute clarity about the type of stocks you have invested in (or plan to buy). In this context, common stocks, which are the most popular type of equity shares issued, are important. 

Not sure what common stocks are and how they work? Read this article to discover all you need to know about this class of securities, so you can decide how to make the most of any common stocks you own.

What are Common Stocks? 

Common stocks are regular shares that each represent one unit of ownership in the company that issued them. They are also known as common shares or voting shares. When you hold the common stocks of a company, you are entitled to a share in its profits. These profits may partially be paid out as dividends or entirely reinvested back into the company. 

Common stocks also generally offer voting rights to the shareholders. This way, they can be a part of the key decisions that impact the company’s future growth and profitability. Investors can earn in two ways from common stocks — namely, dividends and capital appreciation. 

Dividends are portions of the company’s profits that may be paid out to shareholders. Capital appreciation occurs if the shares increase in value, leading to profits for the holder of the common stocks. 

Key Features of Common Stocks

Now that you have seen what common stocks are, let us discuss the main characteristics of these financial assets. By knowing the features of these shares, you can structure your investments in a way that leverages these characteristics to your advantage. 

• Specific Rights for Shareholders

Common stocks offer some rights to shareholders. For instance, they offer holders the right to receive dividends and to receive any remaining assets (in order of specific priority) if the company undergoes liquidation. They also give holders voting rights, so they can vote on important matters that affect the company. However, the extent of these rights may vary from those offered by other types of shares and financial securities issued by a company. 

• Returns on Shareholdings

Holders of common stocks can earn returns on these securities in different ways. If the value of these shares increases over time, the share price may rise well beyond the price at which they were purchased. This results in capital gains for the shareholders. Similarly, if the company is consistently profitable and wants to allow shareholders to partake in these gains, it may distribute dividends to investors. 

• Different Investment Options

It is easy to become a common stockholder in India. Investors have various avenues to choose from to purchase common shares. Directly buying these securities over the stock exchange is the most popular route. Equity mutual funds also allow investors to own common shares of different companies. Aside from these avenues, direct stock plans and dividend reinvestment plans also make common stock investments possible. 

Classification of Common Stocks

Common stocks can be grouped into various categories depending on their defining characteristics. Before you invest in a company’s shares, you need to know what the different types of regular shares are, so you can make an informed selection.

• Based on Market Capitalisation

Market capitalisation is the total market value of the outstanding shares of a company. Depending on a company’s market cap, its shares can be classified as follows:

• Large-cap stocks: These are the shares issued by companies with the 100 largest market capitalisation values in the market. 
• Mid-cap stocks: These are the shares issued by companies ranked from 101 to 250 in terms of market cap. 
• Small-cap stocks: These shares are issued by companies with smaller market capitalisations, ranked from 251 onward. 

• Based on Benefits

Different types of common stocks offer different benefits. So, they can also be classified as follows based on the advantages they offer investors. 

• Value stocks: These are shares issued by companies that are currently undervalued by the market. They are expected to appreciate in value over the long term.
• Growth stocks: These shares belong to companies that are expected to record strong earnings growth over time. 

Key Things to Know About Common Stocks 

Classification aside, you also need to know some fundamental details about common stocks, like why companies issue them, how they are issued and who can purchase them. Let us check out these details. 

• Why Companies Issue Common Stocks 

Companies issue common shares to raise capital and meet their financing requirements. It is an alternative to borrowing money. If a company does not want to add more debts to its books, issuing common stocks offers it a more viable alternative to obtain the funds needed for various business purposes like expansion, growth, debt repayment etc. 

• How Companies Issue Common Stocks 

Companies issue common stocks to shareholders through Initial Public Offerings (IPOs) in the primary market. Once issued, the common shares are then available for trading in the secondary market. Here, you can buy or sell the shares via stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). 

• Eligibility to Buy Common Stocks 

Anyone with a demat and trading account can buy common stocks. You can purchase them from the NSE or the BSE since they are publicly traded. That said, eligibility is one thing, but a good investment is another. So, always ensure that you perform the due diligence required to ensure that a company’s stocks are worth investing in. 

Advantages of Common Stocks 

Common stocks can be beneficial to investors and companies in many ways. Check out the advantages of these financial securities. 

• Voting Rights and Ownership 

Holders of common stocks have ownership in the company and often have voting rights. This allows them to influence important company decisions like electing the board of directors.

• Potential for High Returns

Common stocks offer the potential for significant capital appreciation over time, especially if the company performs well. This makes them attractive for long-term investors.

• Dividend Income

Some common stocks also pay dividends. This provides shareholders with an additional stream of income over and above any potential capital gains.

• Liquidity

Common stocks are usually highly liquid, meaning they can be easily bought or sold on the stock market. So, investors have additional flexibility and quick access to cash.

• Inflationary Hedge

Over the long term, common stocks have the potential to outpace inflation. This helps preserve the purchasing power of investors' capital better than fixed-income securities.

Limitations of Common Stocks 

Common stocks also have some risks and downsides that you should be aware of, as outlined below:

• Market Volatility

Common stocks are subject to market fluctuations. This may lead to significant short-term losses, especially in volatile markets.

• No Guaranteed Returns

Unlike bonds, common stocks do not offer guaranteed returns. Also, dividends can be cut or eliminated if the company faces financial difficulties.

• Residual Claims

In the event of liquidation, common stockholders have a lower priority than bondholders and preferred shareholders. So, they may receive little or nothing if the company goes bankrupt.

Conclusion

The bottom line is that common stocks are accessible and potentially lucrative investments that offer ownership in companies and the chance for high returns. However, they also come with risks like market volatility and no guaranteed income. To navigate these complexities effectively, it’s essential to have reliable research at your fingertips.

That's where Motilal Oswal's Research 360 comes in. With comprehensive market analysis, expert insights and a user-friendly platform, Research 360 equips you with the tools to make informed decisions about your equity investments. Whether you're a seasoned investor or just starting, you can rely on the Research 360 platform to guide you through the ups and downs of the stock market.