Common Stock | Equity Share | Importance | Rights and Privileges
Arjun EP
Common Stock | Equity Share | Ordinary Share
Common stock is also called ordinary share or equity share.
Stock is an ownership document.
It is issued by a limited company to collect capital.
Every limited company is established with the help of common stocks.
In other words, no common stocks, no limited company.
The total or authorized capital of the company is divided into small fractions; this fraction is called stock.
Shares are transferable to other persons and companies.
The persons who purchase shares from a limited company are called stockholders or shareholders.
Equity stockholders do not have preferential rights in the payment of dividends and repayment of capital at the time of winding up.
The dividend rates on these stocks are not pre-determined.
Common stockholders can get dividends only after interest on debenture and dividends on preferred stocks.
At the time of winding up, common stockholders get capital only after all the debts and preferred stock.
Keep in Mind
Types of Shares | Types of Stocks | Common Stocks | Preferred Stocks |
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Generally, there are four types of stocks; they are: Common stocks (equity shares, ordinary shares) Preferred stock (preference shares) Right shares Deferred shares |
Common stocksCommon stocks are also called ordinary shares and common shares. The persons who receive or purchase shares from a limited company are called stockholders or shareholders. Common stockholders do not have preferential rights in the payment of dividends and repayment of capital at the time of winding up. |
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Preferred stocksThese stocks are also called preference shares. These shares can be issued only after issuing of common stocks. The persons who receive preferred stocks are called preferred stockholders or preference shareholders. These stockholders have preference rights in the dividend received. Generally, dividend rates are pre-fixed on preferred stocks. |
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Rights shares | Stock DividendThese types of stocks or shares are issued to existing common stockholders of the company. Generally, these stocks are issued to common stockholders as a dividend. These stocks are not offered to the public subscriber. These stocks are added with common stock capital in the balance sheet. |
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Deferred sharesThese shares or stocks are also called founders’ shares or managements’ shares. The company issues these stocks to the founders or management as a token of love. Deferred stockholders can get dividends only after common stockholders or equity shareholders. |
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Journal Entries in Nepali |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Depreciation |
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Financial Accounting and Analysis (All videos) |
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Importance of Common Stock
Important to the company
No need to pay the dividend in case of loss of the company.
No need to refund money to common stockholders before winding up the company.
The directors are elected by common stockholders to effective management.
Important to shareholders
Every stockholder has the right to voting to elect the directors of the company.
If a company earns more or a high profit, common stockholders can get high dividends.
Common stockholders can easily sell or transfer their shares to other members.
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Features of Common Stock
The main features of common stock are as follows:
Permanent capital
Common stock capital remains permanently with the company.
It is returned only when the company is wound up.
Therefore, common stockholders are the permanent investors.
Owners
Common stockholders are the actual owners of the company.
They invest initial capital.
They bear the highest risk.
Transferable
Common stocks are transferable.
Ownership of common stocks can be transferred with or without consideration to other shareholders.
Dividend
Common stockholders do not get a fixed rate of dividend.
A dividend payable to common stockholders is an appropriation of profit.
If the company does not earn profit any year, common stockholders may not get the dividend.
Voting right
Common stockholders have the voting right according to their shares.
Common stockholders have the legal power to elect the board of directors (BOD).
They can replace them if the board fails to protect the interest of the shareholders.
Common stockholders have the right to control the affairs of the company.
Limited liabilities
Common stockholders have limited liabilities upto their investment.
If a company bears a heavy loss, common stockholders do not need to invest more than their shares investment.
Advantages of Common Stock
By the view of a company
Minimum restrictions
The company has minimum restrictions from common stock financing.
The company has no legal obligation to pay the dividend.
The company has to pay a dividend to the common stock if it makes earnings.
Maturity
There is no fixed maturity period for common stock.
Hence, it reduces the obligation to make the repayment in the future.
Sold easily
The common stock can be sold more easily in the market.
It is attractive to certain investors due to more expected returns than in preferred stocks and bonds.
Increasing in borrowing capacity
Common stock helps to increase the future borrowing capacity of the company.
If the common stock capital is more, the financial manager receives flexibility.
It became easier to borrow funds in the future.
By the view of the investor
More income
The common stockholders are residual claimers.
Hence, they receive all portion of the profit left after making all other payments.
Bonus share or stock dividend is also received in common stock.
Participation in management
Common stockholders can participate in management using their voting rights.
Thus, they can control the company.
They elect the board of directors for their benefit.
Best investment
It is saying that more risk more gain.
The person who takes the risk in investment in common stock, they can take huge benefit from it.
Ownership
Common stockholders are the real owners of the company.
While buying the common stock, the investor receives a share certificate at which the number and the prices of the share are mentioned.
They have voting right.
Therefore, they have the right to ownership.
By the view of a company
High cost
Common stock is an expensive source of long-term finance.
The common stock is regarded as more risky security than bond or preferred stock.
It needs large flotation costs as underwriting commission, brokerage fee and other expenses.
Heavy dividend
The company has to pay a large amount of dividend from profit.
Thus, the company cannot maintain different types of funds for future investment.
No tax benefit
Common stock dividend is not tax-deductible.
In other words, while calculating the taxable income of the firm, the dividend cannot be deducted as an expenditure.
Obstacle in management
Common stockholders have voting right.
Due to a large number of common stockholders and right on management, they can form a group.
Grouping makes obstacles in management and decision making.
Over capitalization
The amount of capital collected from equity capital cannot be refunded easily like debt or preferred stock.
Due to more capital, the company may have to face the problem of over capitalization.
By the view of an investor
Irregular income
There is no fixed dividend rate in common stocks.
The income of investors is irregular and uncertain.
There is no legal obligation to provide a dividend.
Therefore, the board of directors may decide not to give the dividend.
Last priority
Common stockholders have the last priority in liquidation.
In other words, the common stockholders receive what is left after distributing it to the preferred stockholders and bondholders.
Loss in capital
The income of the company decreases during periods of recession.
Due to this, the rate of a dividend of common stock decreases and the market price of common stock also decreases.
Thus, the investors will lose their capital.
Rights and Privileges of Common Stockholders
The rights and privileges of shareholders vary from state to state, and country to country.
But some common rights are given below:
Right on income and assets
Common stockholders (common stockholders) have the right to profit from the organization.
Similarly, they have the right to the remaining fund after paying all liabilities.
Thus, common stockholders have the right to income and assets.
Voting right
Every common stockholder has the voting right to elect managing directors.
Each shareholder has one voting right.
In the absence of shareholders, a proxy vote can be done.
After electing the managing director, he does work in favour of shareholders.
Dividend
Common stockholder receives dividend on his shares.
A dividend is paid from profit.
If there is a loss in any accounting year, shareholders cannot receive the dividend.
There is not dividend guarantee.
Transfer of ownership
Shareholders can transfer their right of shares to another person.
The right to transfer of ownership is ordinary.
It can be done with the help of a share broker.
Share broker charges his fees for this work.
Authority to inspect books and records
Shareholders have the authority to inspect books of accounting.
Although all the limited companies publish their financial statement at the end of the accounting period yet shareholders can inspect any working time of the company.
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