Common stock is also referred to as equity/ ordinary shares. Involves investors having control and ownership of investments in business/ organization. The common stockholders are entitled to returns in the form of dividends from their investments. Businesses with common stocks have higher risks than those trading with bonds. Common stocks give the owners the right to claim a share of profit in the form of dividends based on their shares. It also allows the shareholders to vote when electing the board of directors for the company (Halkola, 2021). Equity stock is distinct from other securities in an organization as it gives the shareholders rights to control an organization’s business operations. In business liquidation, common stock owners are entitled to get their shares after settling the preference shareholders, creditors, and bondholders. Therefore, the risk associated with common stock is being the last to get dividends and stock when the company ends its operations.
Corporates have different classes of common stock with diversified roles, which present different features of the stocks. For instance, some of the equity shareholders will have voting powers when electing directors, while other others will not have such powers. Furthermore, the ordinary shareholders have priority to be issued new shares through IPO- initial public offering. Through IPO, the business will have an opportunity to expand its operations as a result of gaining more capital (Halkola, 2021). Common stock is also characterized by the right to receive dividends. Shareholders are entitled to receive dividends as a return on their investments. The dividends are issued with a proportional equal to the percentage of the investor’s ownership in the business.
A Market is defined as a global economic platform where securities exchange transactions are conducted (Meng & Khushi, 2019). The common stock is traded on two major market securities, comprising the primary and secondary markets. The primary market involves creating and issuing new stocks and shares to the public. This is done through an initial public offering (IPO), whereby a private company issues shares to the public by the private company. An IPO is whereby a private company issues its new shares to the public for the first time. This can be demonstrated when the investors buy shares from the banks’ undertakings.
The secondary market involves the aspects of the stock market or stock exchange. Common stocks are traded on the stock markets, such as NASDAQ, S&P 500, and DJIA. The major distinction between the two stocks is that the investors trade among themselves in the secondary market (Meng & Khushi, 2019). Furthermore, in secondary markets, there are bid and ask prices concepts whereby the investors trade through an auction.
The secondary market is highly associated with the concepts of ‘bull, and ‘bears.’ Bull markets are characterized by investors waiting to exercise their socks when the stock prices increase. The market is referred to as bull as investors wait to exercise their securities when the prices are high to get more returns. Investors gain confidence to invest in the bull market since the economy is strengthened with investment traits (Meng & Khushi, 2019). A prolonged drop in investment prices characterizes a bear market. It is described by a 20% decrease in the securities, which makes it difficult for investors to venture into investments. Bear markets present economic instability, exposing investors to high financial risks. Common examples of bear markets comprise put options and short selling.
References
Halkola, P. (2021). Modeling of stock returns in the market crash and recovery period using stock- and firm-level characteristics: Case of Covid-19 and financial crisis. Lutpub.lut.fi. Web.
Meng, T. L., & Khushi, M. (2019). Reinforcement Learning in Financial Markets. Data, 4(3), 110. Web.