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Common Stock

Common stock refers to a kind of security that is representative of equity ownership in a company. People who own this stock have voting rights in the company and will be entitled to a share of the company’s profits in the form of capital appreciation and dividends. Similarly, the stockholders will also get a share of the company’s assets in case of liquidation after all the other creditors and bond holders are paid off. Depending on the number of shares that a person owns in a company, he/she may vote for the company’s board of directors. Given below are some important questions about common stock that are answered by Experts.

How is the rate of return on common stock equity calculated?

The rate of return on common stock equity is calculated by dividing the net income less preferred dividends by the average common stockholder’s equity.

What kind of a transaction would it be if a person acquired land by issuing common stock?

If a person acquired land by issuing common stock, the transaction would be considered a non cash transaction. Such a transaction may not be reported on the person’s statement of cash flows. However, this transaction may be reported under the investment and activities section of the statement.

In what way are retained earnings and common stock accounts similar?

The similarity between retained earnings and common stock accounts is that both are stockholder equity accounts.

Are perpetual bonds similar to common stock accounts?

Common stock accounts may be similar to perpetual bonds in many ways. Both these investments offer some kind of return to the investors for an indefinite amount of time. Like common stocks, perpetual bonds also pay interest forever and can be given a finite value. This value will in turn, represent the price of the bonds. The value of both common stocks and perpetual bonds will not increase with time but the investor will be given a guaranteed interest irrespective of the market situation.

What is the formula for calculating the current market value of a common stock if the expected dividend and growth rate are given?

If the expected dividend and growth rate are known, then the formula for calculating the value of common stock would be as follows:

Value of Common Stock = Expected dividend/ (Required Rate – Growth Rate)

What is the difference between common stock and preferred stock?

There are a number of differences between common and preferred stocks. The main difference is that in case of bankruptcy, the people who invest in common stock may receive their invested funds only after the preferred stock holders get their share. Besides this the other differences are:

Common stock may only be issued to the employees or founders of the company and not other investors. The other investors of the company may get the preferred stock.

In comparison to preferred stock holders, common stock holders may have a smaller claim to the company’s assets and funds. For instance, if the company is doing well and making good profits, any money distributed in the form of dividends would first go to the preferred stock holders and then the common stock holders. Similarly, in case of company liquidation or bankruptcy, any amount would first be given to the preferred stock holders and then the common stock holders.

The dividends received by people who own common stock will be lesser than people with preferred shares. The preferred stock dividends will also be paid at regular intervals while the decision of paying the common stock holders lies with the company’s board of directors. As a result the common stock may fluctuate from time to time.

Common stock holders can claim capital appreciation and dividends from the companies. Their price will be directly linked to the markets unlike the cost of preferred stocks.

You may have a number of options to invest your money in depending on how much you are prepared to invest. In order to make a calculated choice of investment, you need to know the different features of these investment options. You need to be aware of what the pros and cons of these options are and how they will benefit you. You may take the answers of an Expert to understand common stocks and their features if you are thinking of investing in them.
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