What are Common Shares, Stocks and Equities
Common shares, stocks, and equities are terms frequently utilized reciprocally in the financial world, but they have distinct meanings. In today's business, Investing in shares is one of the best money management decisions.
Definition of Shares, Stocks, and Equities
Stocks represent ownership certificates in a specific organization. At the time, when you purchase stocks, you are purchasing ownership in that organization.
Shares are units of possession in an organization. Each share refers to the fraction of ownership in the corporation.
For example, If a corporation has issued 5,000 and, you own 1000 shares, you own 20% of the organization.
Equities is a broader term that refers to proprietorship interest in any class of assets, not simply in stocks. It can include stocks, bonds, shares, real estate, and other type of short-term and long-term investments.
Understanding the Common Shares, Stocks, and Equities
Common Stock: Securities that represent the unit of ownership along with its ultimately associated risk in a corporation.
Common stockholders are the ultimate owners of a company, they enjoy the benefits of
ownership and their liability does not exceed the invested amount in the company's share.
So, their liability is limited to their individual invested amount. In case of liquidation of the
company, after paying the claims of the preferred stockholder and creditors, If any balance
is left, it goes to the common stockholders.
However, common stockholders can liquidate their investments by selling in Stock
Exchanges, like the New York Stock Exchange (NYS). You can achieve your financial
opportunities by investing in the Best AI Stocks.
Understanding the dynamics of ordinary shares, stocks, and equities is crucial for anybody
who is looking to put resources into the security markets or build a diverse investment
portfolio to minimize the associated risk and maximize the rate of returns.
In this article, we will discuss understanding shares, stocks and equities, common stocks and
their features, what are shares, how to make money by investing in shares, types of stocks
and risks associated, etc.
Features of Common Stock
Here are the described features of common stock. By learning these, you can easily
understand common stocks and the risks and rewards related to stock investment.
Ⅰ) What are Authorized, Issued, and Outstanding Shares
There are three main legal documents of any corporation, articles of association, the charter
of association, and the prospectus of association. The corporate charter contains the number
of Authorized Shares.
Ideally, a company holds some portion of its authorized shares in the form of un-issue
shares. The number of Ordinary Shares offered for buying to the general public become
issue shares of the company. The outstanding shares are the number of issued shares, that
are actually held by the general public.
Ⅱ) What is the Par Value of the Stock
Par Value: The face value or nominal value of any stock or bond is called Par Value. This
value has no relation to market value and is used only for accounting purposes in the books
of accounts. The charter of the corporation specifies the par value of the stock.
At the time of IPO (Initial Public Offer), a corporation can issue shares at three price levels,
At Par, Premium, and Discount Value.
Typically, a company should not offer its shares at a discount value because this discount
becomes a liability to the shareholders of the company and in case of liquidation of the
company, the common shareholders are liable to pay it to the creditors. A company can buy
back its shares from the financial market.
Treasury Stock: The fraction part of a common share that has been repurchased and held
by the issuing company is called treasury stock.
Ⅲ) What is the Book Value of Common Stock
Book value is the value of any company that has been historically recorded in the books of
accounts. If that value is more than the value of the market price, then the share is
undervalued and if this specific share is purchased there can be a potential profit.
If Book Value per Share is less than the latest market price of the share, this stock is overvalued. So, there is a risk of loss if bought as the price may go down in near the future.
The book value per share of common stock is calculated as follows:
Book Value Per Share = ( Shareholder's Equity - Preferred Stock) / Number of Outstanding Shares
Ⅳ)What is the Liquidating Value of Common Stock
The liquidating value per share of common stock is as follows:
Liquidating Value Per Share = ( Total Assets - Total Liabilities) / Number of Outstanding Shares
The liquidation value is calculated in case of liquidation of the company. This value has no
direct relationship with the market value. The share at liquidating value is the value that is
left over after paying all the liabilities.
To derive the liquidity value there is a whole the liquidating process is usually performed by
a regulatory body, which derives this value to protect the stakeholder's interests.
Ⅴ) What is the Market Value of Common Stock
The market price of common stock is the price at which the stock is currently trading in an
organized exchange where it is listed. The market price of many inactive stocks is
difficult to perceive due to the lower level of liquidity.
A market price of a share covers the current and expected future dividends and the perceived risk of loss on the investor side.
Usually, the new company's shares are traded in the over-the-counter market (OTC). Where
usually, two or three security dealers are given their inventory.
After time goes by, the company grows, and its number of shareholders and transaction volume increase, it qualifies for listing. Once done, it is listed in different organized exchanges such as the New York Stock Exchange. However many companies prefer the OTC marketplace.
Types of Shares
There are two main types of stocks: common and preferred.
Ⅰ) Common Stocks
Common stock specifies a possession in an organization and typically confers voting rights
to the shareholder at company meetings. Stockholders are entitled to receive dividends if
declared as dividends are not guaranteed and dividend rates may vary depending on the
company's performance, policies, and other financial conditions.
Ⅱ) Preferred Stock
Preferred stock is a kind of stock that usually makes sure the fixed rate of dividend is at the
discretion of the board of directors with no voting to the preferred stockholders in the
company meetings.
However, it has a preference over common stockholders in the payment of claims on assets
at the time of the company's liquidation. Preferred Stock is a form of financing combining
the hybrid feature of debts and common stocks.
Compared to common stock, preferred stock shares have a greater claim on the company's
assets and earnings with no voting power but are entitled to receive fixed dividends at the
discretion of the board of members before any dividends are declared and distributed to
common shareholders.
Do Shares Make You Money, How?
The main reason to invest and keep hold of shares is to earn the maximum rate of returns.
Here are some key ways shares can make you money:
Ⅰ) Capital Appreciation:
Capital appreciation in ordinary share investment refers to the increase in the value of
common share. It is a price appreciation of a stock due to market price fluctuations.
This increase depends on various factors such company's growth, increased profitability, top-level management, or favorable market conditions. A smart investor focuses on companies with strong fundamentals.
By investing, holding, and following discipline in financial planning, he aims to benefit from capital appreciation.
ⅠⅠ) Dividend Income:
Many companies distribute a portion of their profit to the shareholders through dividends. A dividend is income earned from common shares investment.
In a long-run prospectus, the dividend can provide a steady income stream, and reinvesting dividends can further boost your investments over time by leveraging the power of compounding.
ⅠⅠⅠ) Stock Splits and Bonus Shares:
Many companies issue Bonus Shares or Split Shares in proportion to existing shares
possibly increasing liquidity and attracting more investors. Existing shareholders received
bonus shares without requiring additional investment. This increases the investor's stake
and if he holds, there is potential to increase future dividend income and capital
appreciation. A few corporations might split their shares.
Both mechanisms can improve the overall value of the investment, providing opportunities
for-profit through increased share value and dividend payouts.
Ⅳ) Rights Issue:
The right issue offers to purchase additional shares at a discount value. This is only
available to the existing shareholders.
Ⅴ) Stock Buybacks:
Repurchase of stock issues is stock buybacks. It leads to an increase in share value and is a
source of income for stockholders. Buybacks are positive signs that stock is undervalued
and has the potential to increase share price in the market.
What are the risks of Investing Shares
Risks Associated with Investing in Shares
Stock markets are very volatile and proper knowledge and research are necessary to
mitigate the risks involved with the share investment.
Some Key risks associated with investing in shares are as follows:
Ⅰ) Market Risk:
Market risk is a systematic risk. It is a risk that affects the overall stock market. Factors like
interest rates, inflation, market sentiments, and political situations can affect the stock
market. Such market risks can't be eliminated through diversification, as it influence the
entire market.
ⅠⅠ) Company Risk:
It is a company-specific risk and is known as unsystematic risk. This type of risk can arise from factors like poor management decisions, competitive pressure, industry trends, and legal or regulatory issues. A well-diversified portfolio of shares can mitigate the risk on overall investment.
ⅠⅠⅠ) Liquidity Risk:
Liquidity is the ability of a security to buy and sell easily without significantly losing its fair
market value. Some stocks have low trade volume, remain inactive, and face restrictions
on trade freely in the market. In case of need, otherwise, selling at a discount is required to
attract potential buyers.
ⅠⅤ) Currency Risk:
Investing in foreign-based companies is exposed to risk in current rate fluctuation, at
the time when you convert your investment into local currency.
Ⅴ) Interest Rate Risk:
An Interest rate change influences share market prices in several ways. When interest rates
increase, it increases borrowing costs. It reduces investor's confidence which leads to share
prices falling and vice versa.
ⅤⅠ) Inflation Risk:
The inflation risk can affect the share market in several ways. When the inflation rate is
high, there is less purchasing power of money & low consumer consumption affects the
cost of production for the companies.
It reduces corporate profits and stock prices as investors assess their investments in shares,
based on the company's potential earnings. So, the relationship between inflation and the
share market is complex and depends on prevailing economic conditions and investor
market sentiments.
ⅤⅠⅠ) Political and Regulatory Risk:
There can be changes in tax laws, the country's political condition, government trade policy,
and regulatory changes relating to specific industries. Investors need to assess these key
risks when making investment decisions.
Mitigating Risks
It is impossible to avoid all risks but investors can take the following key steps to mitigate the risk level.
Ⅰ) Diversification:
By diversifying the investment portfolio, industry-specific risk can be reduced.
ⅠⅠ) Research and Due Diligence:
Proper research, asking questions before investing, and showing due diligence before
investing in shares can reduce your potential risk.
ⅠⅠⅠ) Regular Monitoring:
Investing in shares demands regular monitoring of the market and staying informed on the
latest company performance and its impact on market conditions.
ⅠⅤ) Professional Advice:
If you are new, seeking advice is a prudent approach. A professional advisor can provide a
personalized guide according to the investor's goals, investment timelines, and risk ability
of the investor.
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