Discuss the essential characteristics of common stock.

Expert Solution

The essential characteristics of common stock are :

Common stock represents ownership in the company. The entire common equity is sub-divided into several shares of equal face value. Each share represents a fraction of the ownership of the company.
Common stock carries voting rights. The holders of common stock have the right to vote in shareholder resolutions and shareholder meetings. Usually, each share carries one vote. However, some companies issue shares with differential voting rights, where there are different classes of shares with different voting rights. For example, one class of shares could carry one vote for every ten shares held. Companies issue shares with differential voting rights to avoid diluting control.
Common stock is receives dividends out of the profits of the company. However, unlike preferred stock or debt, dividend is not mandatory to pay. The decision to pay dividend, and the rate of dividend are at the discretion of the board of directors.
In the event of bankruptcy of the company, common stockholders will have the last preference in getting paid. Creditors and preference stockholders will be paid back before common stockholders.

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