What are Common Stocks

Common stocks are one of the most prevalent forms of equity ownership in a company. When you own common stock in a company, you essentially own a share of that company's assets and earnings. These stocks represent ownership rights in a corporation and are typically bought and sold on public stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).

Types of common stock

1. Growth stocks:

• Characteristics: Growth stocks belong to companies experiencing rapid expansion, often reinvesting earnings for growth. Examples include Bank of Baroda and Bajaj Auto.
• Investment focus: Investors seek capital appreciation as they anticipate the stock's value will increase over time.

2. Value stocks:

• Characteristics: Value stocks are undervalued by the market, with lower P/E ratios. Examples include L & T Technology and Abbott India.
• Investment focus: Investors look for stocks trading below their intrinsic value, anticipating a rise as market perception changes.

3. Large-cap stocks:

• Characteristics: Large-cap stocks belong to well-established companies with a market cap over Rs. 20,000 crore. Examples include Tata Consultancy Services (TCS) and Cipla Limited.
• Investment focus: Investors prefer stability, dividends, and lower risk with these stocks.

4. Mid-cap stocks:

• Characteristics: Mid-cap stocks have a market cap between Rs. 5,000 crore and Rs. 20,000 crore. Examples include Castrol India and Just Dial.
• Investment focus: Investors seek a balance of growth potential and stability.

5. Small-cap stocks:

• Characteristics: Small-cap stocks have a market cap below Rs. 5,000 crore, often showing high growth potential. Examples include Remus Pharma and Bajaj Steel Industries.
• Investment focus: Investors aim for substantial growth, accepting higher risk for potential returns.

These categories offer diverse opportunities for investors in the Indian stock market. Tailoring your investments to your financial goals and risk tolerance is crucial.

Please note: The examples provided are as of October 9, 2023 and are subject to change based on the company earnings, stock market fluctuations, or any other external events/ factors that may impact the stock prices and market capitalization of these companies.

These stock categories offer diverse opportunities for investors in the Indian stock market. Tailoring your investments to your financial goals and risk tolerance is crucial.

Additional read: Types of stock trading

Why are common stocks issued?

Companies issue common stocks for various reasons, including:

1. Raising capital: The primary reason for issuing common stocks is to raise capital for business expansion, research and development, debt reduction, or other corporate purposes.
2. Ownership transfer: Common stocks allow businesses to transfer ownership without transferring physical assets. This is particularly important in the case of succession planning or selling a portion of the company.
3. Liquidity: Publicly traded common stocks provide liquidity to existing shareholders, allowing them to easily buy or sell their holdings.

Features of common stocks

Understanding the features of common stocks is crucial for investors. Here are some key characteristics:

1. Ownership: Common stockholders have ownership rights in the company, granting them a share of profits, assets, and a say in corporate decisions through voting rights.
2. Dividends: While common stockholders have the potential to receive dividends, they are not guaranteed. The payment of dividends depends on the company's profitability and its decision to distribute earnings.
3. Voting rights: Depending on the class of common stock, shareholders may have the right to vote on corporate matters such as the election of directors and major business decisions.
4. Residual claims: In the event of bankruptcy or liquidation, common stockholders have a residual claim on the company's assets, but they stand behind preferred stockholders and bondholders in the hierarchy.

Benefits of common stocks

Investing in common stocks offers several benefits:

1. Potential for high returns: Historically, common stocks have provided higher returns compared to many other asset classes over the long term.
2. Ownership in profitable companies: Owning common stocks allows investors to share in the success and growth of profitable businesses.
3. Liquidity: Publicly traded common stocks can be bought or sold easily on stock exchanges, providing liquidity for investors.
4. Voting rights: Some common stocks come with voting rights, giving shareholders a say in company decisions.
5. Diversification: Common stocks can be part of a diversified investment portfolio, reducing overall risk.

Limitations of common stocks

While common stocks offer many advantages, they also come with certain limitations and risks:

1. Volatility: Common stocks are prone to price volatility, and their value can fluctuate significantly in the short term.
2. No guaranteed returns: Unlike bonds, common stockholders have no guaranteed interest payments, and dividend payments are not assured.
3. Risk of loss: There is a risk of losing the entire investment if the company goes bankrupt or if the stock's value declines significantly.
4. Limited influence: Even with voting rights, individual common stockholders typically have limited influence on corporate decisions.

Who should invest in common stocks?

Common stocks can be suitable for various types of investors, but they may be particularly appealing to those who:

• Have a long-term investment horizon.
• Are willing to tolerate market volatility.
• Seek higher potential returns compared to conservative investments.
• Are looking to build wealth over time through capital appreciation.
• Have a diversified investment strategy that includes a mix of asset classes.

It's important for investors to assess their risk tolerance and investment goals before committing to common stocks.

Common stocks and balance sheet

On a company's balance sheet, common stock is typically listed under the shareholders' equity section. It represents the total value of shares issued to investors and is calculated by multiplying the number of outstanding shares by the stock's market price.

Common stock is an essential component of a company's capital structure, providing a source of equity financing.

Common stocks vs preferred stocks

Now, let's compare common stocks to preferred stocks:

Common stocks:

• Represent ownership in the company.
• Typically offer voting rights (depending on class).
• Dividends are not guaranteed and can vary.
• Lower priority in terms of dividends and assets in case of bankruptcy.
• Potential for higher returns but also higher volatility.

Preferred stocks:

• Represent a hybrid between stocks and bonds.
• Often have fixed dividend payments.
• Typically do not offer voting rights.
• Higher priority in terms of dividends and assets in case of bankruptcy.
• Generally less volatile than common stocks.

The choice between common and preferred stocks depends on an investor's preferences and financial objectives. Common stocks are more suitable for those seeking growth and willing to accept higher risk, while preferred stocks may appeal to income-oriented investors seeking steady dividends.

Conclusion

Common stocks play a significant role in the world of investing, offering the potential for high returns and ownership in successful companies. However, they also come with risks and uncertainties. Understanding the various types, features, benefits, and limitations of common stocks is crucial for investors to make informed decisions about their investment portfolios. Additionally, comparing common stocks to preferred stocks allows investors to tailor their investments to their financial goals and risk tolerance.

If you're looking to start investing in common stocks, the first step ahead would be finding a reliable stockbroking firm that would facilitate the investment process. Consider opening a Demat and trading account with Bajaj Financial Securities Limited for a seamless and secure investment experience.