Stock represents part ownership in a firm and there are two major types.
• Common stock
• Preferred stock
Common stock
The main features of the common stock:
• Generally, each common stock owned entitles the investor to one vote in a corporate shareholders’ meeting.
• The investor in such stock receives benefits in the form of dividends, capital gains or both.
• Common stock has no stated maturity. Common stock does not have a date on which the corporation must buy it back. Some corporations pay cash to their shareholders by purchasing their own shares. These are known as share buybacks.
• Common stocks have historically provided a higher return, but they also have higher risk. An investor earns capital gains (the difference between the purchase price and selling price) only when they sell at a price higher than the purchase price.
Main advantages of common stock as investment:
There are many benefits that investors enjoy when they use common stocks as investment. Once you invest in common stocks, the advantages are;
• Investment income is usually higher compared to preferred stocks.
• Investor can receive operating income in cash dividends.
• Very high liquidity which can easily be moved from one investor to the other.
• Low transaction costs in comparison with preferred stocks
• Lower nominal price of common stock in comparison with the other securities.
Main disadvantages of common stock as investment
Like everything else, common stock investing comes with some drawbacks. The following are what successful investor considers to be red flags in common stocks investing.
• More risky in comparison with many other types of securities.
• Selection of these securities is complicated: high supply and difficult to evaluate.
• The operating income is relatively low (received from capital gain – change in stock price).
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