Understanding common stock and why companies issue them

Common stocks are the shares of a company, which large businesses and corporate issues to raise funds. Rarely some partnerships or trusts can also offer their shares, but only in special circumstances. Initially company’s shares are held by a group of individuals but when some business is going through significant growth and it needs substantial capital, it can offer its shares to the general public and investors. Companies are said to be “going public” when they list themselves on some stock exchange.

 

Where to buy these common stocks:

Initial public offerings take place in primary markets. Original issuers will offer these stocks as financial claims to general public; in return of cash they receive from these investors. Sold shares are called “issued and outstanding”. Sometimes the company will purchase some of them back; these shares are kept in treasury and recorded as “issued but not outstanding”. After the IPO (Initial Public Offering) the shares (or stocks) are traded (repeatedly sold and purchased) in secondary markets. These secondary markets are normally known as stock exchange, for example The American stock exchange or New York stock exchange. Difference between primary and secondary markets is that the original issuer is not going to get any cash from the sales of stock in secondary markets. Stock prices are quite high on the first day of initial public offering and normally big players are involved. Normally companies hire investment bankers to manage the initial offerings process. All companies are allowed to offer only a limited number of shares, which is mentioned in the articles of incorporation (known as authorized shared capital).

 

What kind of rights do you get with these stocks?

As stated above, common stocks are financial claims. When you purchase and hold a share, you become one of the (many) owners of that company. Stockholders are entitled to vote for the appointment of company’s directors and some other major decisions. One share means eligibility to cast one vote. Voting (through majority voting system or cumulative voting system) is needed for various decisions. Stockholders are also entitled to receive dividends when the board of directors decides to pay. Corporations can pay these dividends in cash or they can simply offer more shares to their stockholders. You can also earn by reselling these stocks for higher prices at stock exchange. At the liability side, the stockholders have “limited liability” i.e. the amount of shares they own is the most they can lose if the company gets into trouble or goes bankrupt.