Meaning and definition of Common Shares
Common shares can be aptly defined as securities in lieu of equity ownership in a corporation. These common shares provide voting rights and entitle the share holder to a share of the success of the company through capital appreciation and dividends. The common shareholders, in the occurrence of liquidation, can have the rights to the assets of the company only after preferred shareholders, bond holders, and other debt holders have been satisfied.
Common shareholders also have the privilege of voting rights concerning other matters in the company, like company objectives and stock splits. Other than these voting rights, common shareholders, sometimes, also enjoy “preemptive rights” which let common shareholders maintain their relative ownership in the company during the time when company issues a new offering of the stock. This means that the common shareholders can buy as desired shares of stock.
When a shareholder buys the common shares of a company, he/she becomes a part owner of the company. As a part owner, the shareholder shares the profits of the company either through rising value of shares or through the way of dividends. But if, in case, the company does not do well and faces a loss, the shareholder will receive no dividends and the value of shares will consequently drop.
However, over a long period of time, the common shares have provided the investors with higher returns than those received through any other kind of investment.
What are the risks involved?
Generally, stocks are considered as risky investments. This is because the whole of your investment would be lost if the company invested in fails in market. The shareholders are the last ones lined up for receiving money in the event of wounding up of a bankrupt company. However, some stocks can prove to be even more risky than others.
Smaller companies, not having the records of unswerving profit and yet paying the dividends, are the most risky ones. Besides, large companies, which are well established in their industries, and have improved their profits consistently and have been paying regular dividends, are found to be less risky.
Start free ReadyRatios
reporting tool now!
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software