Common stock
What is common stock?
Ordinary shares - Securities that allow participation in the organizational management of the issuing company by voting at the general meeting of shareholders, but do not entitle them to receive a fixed amount dividends.
What types of common stock are there?
The following types of shares are distinguished by type:
- Blue chips or first-tier stocks
These are stocks of the most famous and largest issuers, the companies with the largest capitalizations. These stocks tend to grow in the long term. An important distinguishing feature of blue chips is their high liquidity, i.e. the ability to buy or sell shares as quickly as possible. Liquidity is closely related to the number of free-float shares - usually, the higher the free-float, the higher the liquidity of a stock and vice versa.
The concept of blue chips is subjective, there are no clear criteria that would determine whether a company's shares belong to the blue chips.
The most liquid shares on the Russian market are those of Gazprom and Sberbank.
- Second-tier stocks
It usually refers to stocks that are not included in the list of the most liquid, actively traded securities on the stock exchange. The notion of the second echelon is also subjective.
Second-tier stocks are usually not included in the main stock indices. Most of the second-tier stocks on the Russian market are included in the special RTS-2 index.
How much is a common stock worth?
A common stock may have different values:
- Nominal value
This is the value of the stock as stated on the stock itself when it was issued. Sometimes this value is referred to as par value. The authorized capital of any company is equal to the total amount of shares of common stock issued at par. The par value of the common stock is always the same. It is not the real value of the stock. But sometimes it is used for operations such as: assessing fees, rates, and commissions in an underdeveloped stock market. At Initial IPO The price of the stock should not be lower than its face value; companies usually mark up 10-30 percent.
- Emission value
This is the value of the stock at which it was originally issued. As a rule, the issue price is almost always equal to the par value of the stock. The difference between the issue price and the par value is called the share premium.
- Market value
This is the price that is formed on the stock market. The market price of stocks is determined on stock exchanges and reflects the balance of supply and demand. Many factors influence the market price of stocks, such as the macroeconomics of countries, politics, technical values, central banks and investment funds. One thing to remember is that there are bulls and bears in the stock market, the former buying securities and the latter selling them. Liquidity stock exchanges - is the main factor in the formation of the price. As a rule, the market value reflects the liquidation value.
- Carrying amount
This is the value of all of the company's assets by the total amount of issued shares that are outstanding. When the market price is lower than the book value, it can usually be the future of stock market growth. The book value of shares is usually checked by auditors.
What rights do ordinary shares give the owner?
- Entitlement to dividends
Holders of common stock are entitled to receive a portion of the company's net income in proportion to their equity interest in the form of dividends. However, their payment is not obligatory for the company and depends on the decision of the board of directors. It should be noted that holders of preferred stock have a priority right to receive dividends, which are generally fixed. In other words, dividends on common stock are paid after all applicable taxes and a fixed percentage to holders of preferred stock. The percentage of earnings going to the payment of dividends on common stockThe company may decide not to pay dividends on the basis of the general state of the company.
- Right to receive part of the company's assets in the event of liquidation
Holders of common shares are entitled to receive a portion of the proceeds from the sale of the company's assets in the event of liquidation. At the same time, they occupy the lowest place in the hierarchy of rights, after bondholders, the company's creditors and owners of preferred stock. In other words, holders of common stock will not necessarily receive any payments as a result of the liquidation of the company, since the proceeds, for example, may not even be enough to meet obligations to creditors.
- The right to vote
Unlike preferred shares, common shares give their holders the right to vote in appointing the board of directors and on other fundamental matters such as changes to the company's charter, mergers, divestitures and liquidations. It should be noted that certain classes of common stock may not have the right to vote, which must be specified in the articles of association and permitted by the laws of the jurisdiction.
- Eligibility for Indemnification in the Event of a Merger or Acquisition
If the board of directors and shareholders' meeting approve the merger or acquisition of the company, holders of common stock are entitled to compensation, which may be in the form of a buyback of their shares or in the form of shares in the new company.
- Right of liquidity
Holders of Common Shares have the right to sell them at any time in a public auction or in a private transaction.
How to trade common stock?
Ordinary shares allow for a long time to earn a high return with an equally high risk. If you look at statistics, you can see the following picture: on average, common stock earns 11-12% of par value each year, making it the leader among other types of securities. This stock contributes to capital gains and profits, and also protects against moderate inflation. In some cases, even a small institution support program takes a base from an equity investment.
Because the income from common stock is high, the risk is also high. Risks necessarily depend on the company itself, so they can change.
If you buy shares in a well-known company that has been operating for many years, the risk is much lower. If you buy shares in a little-known company, the risks will increase significantly. If a trader uses margin account, it also greatly increases the leverage in the stock, but it is recommended that only traders with a lot of experience do this.
Technically, trading common stocks is no different from trading currencies on .
Where to buy common stock?
The most common way to buy a common stock is from a brokerage company that provides a comprehensive service. There is no specific minimum for the buyer, other than the price for the stock itself. However, most brokerage firms require that the customer have a minimum of $500 in order to open an account.