Explore the concept of common stocks and their key characteristics in this comprehensive guide designed for BITM, BBA, and BBS students in Nepal. Learn about ownership rights, dividends, risks, and valuation in the Fundamentals of Corporate Finance course.
Thank you for reading this post, don't forget to subscribe!Understanding Common Stocks
In the world of corporate finance, understanding the structure and function of common stocks is fundamental. Common stocks represent ownership in a company and are one of the most popular investment instruments worldwide.
For students pursuing BITM, BBA, and BBS courses in Nepal, learning about common stocks is essential to grasp how companies raise capital, how investors earn returns, and how financial markets operate.
This topic is a cornerstone of the Fundamentals of Corporate Finance course, connecting theoretical knowledge with real-world financial decision-making.
What is a Common Stock?
Common stock (also known as ordinary shares) is a security issued by a company to raise equity capital.
- It is one of the major source of long term capital.
- It represents ownership of the company.
- Common stockholders are real owners of the company.
- Common stock do not have a maturity date.
In simple terms, when investors buy common stock, they are buying a portion of the company and share in its successes or losses.
- Common stock dividend is paid after payment of interest to the creditors, tax to the government, preferred dividend to the preferred stockholders.
Key Characteristics of Common Stocks
Understanding the characteristics of common stocks helps investors and finance students comprehend how these securities function within corporate finance.
- Par Value
- Maturity
- Ownership and Voting Rights
- Preemptive Rights
- Dividend Payments
- Residual Claim on Assets
- Limited Liability
1. Par Value
Par value is the stated price per share of common stock in the corporate charter. It is mostly symbolic and does not reflect the market price. For example, a share with a par value of Rs. 10 may trade at Rs. 50 in the market.
- It is also known as nominal or face value.
2. Maturity
Common stocks do not have a maturity date. Unlike bonds, they represent permanent ownership, and investors can hold them indefinitely as long as the company exists.
3. Ownership and Voting Rights
Common stockholders are owners of the company. They usually have voting rights, which allow them to influence important decisions such as mergers, acquisitions, and the election of the board of directors.
4. Preemptive Rights
Preemptive rights allow existing shareholders to purchase additional shares before the company offers them to outsiders. This protects shareholders from ownership dilution when new shares are issued.
5. Dividend Payments
Dividends on common stocks are not fixed. They depend on the company’s profits and board decisions. Shareholders may receive regular dividends, irregular dividends, or no dividends at all in a given year.
6. Residual Claim on Assets
Common shareholders have a residual claim on company assets after all liabilities and preferred shareholders’ claims are settled in case of liquidation. They are last in line to receive payments.
7. Limited Liability
Common shareholders have limited liability, meaning they can only lose the amount they invested in the stock. They are not personally liable for the company’s debts or obligations.
- This feature makes common stock ownership safer than business partnership structures, encouraging broader investment participation.
Importance of Common Stocks
Common stocks are essential for both companies and investors:
For Companies:
- A primary source of long-term financing
- Helps in raising capital without increasing debt obligations
- Enhances corporate image and market credibility
For Investors:
- Provides opportunities for income and capital growth
- Offers voting power and partial ownership in the company
- Enables participation in the company’s overall success
Common stocks also form a major component of equity financing, balancing a firm’s capital structure alongside debt.
Common Stocks in the Nepalese Context
In Nepal, common stocks are actively traded on the Nepal Stock Exchange (NEPSE). Popular sectors include:
- Commercial banking
- Hydropower
- Insurance
- Microfinance and manufacturing
Companies like Nabil Bank, Nepal Telecom, and Himalayan Reinsurance issue common stocks to raise funds, while investors seek returns through dividends and capital gains.
For BITM, BBA, and BBS students, studying these real-world examples provides practical insight into how financial markets function locally and globally.
Frequently Asked Questions (FAQ)
Q1: What is the main difference between common stock and preferred stock?
A: Common stockholders have voting rights and variable dividends, while preferred stockholders have fixed dividends and priority in asset claims but no voting rights.
Q2: Why are common stocks considered risky?
A: Because their returns depend on market fluctuations, company performance, and economic conditions.
Q3: Can common stockholders influence company decisions?
A: Yes, through voting rights during annual general meetings (AGMs).
Q4: What determines the value of a common stock?
A: The stock’s value depends on future expected dividends, growth rates, and investor-required returns.
Q5: Do all companies pay dividends on common stocks?
A: No. Some reinvest profits for expansion instead of paying dividends, especially in growth-oriented companies.
Conclusion
The concept of common stocks is central to understanding how corporations raise funds and how investors build wealth. Common stocks provide ownership, potential dividends, and opportunities for capital growth — but they also involve higher risks.
For BITM, BBA, and BBS students, mastering the key characteristics and valuation techniques of common stocks lays a strong foundation in corporate finance and investment management.
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