The first characteristic of common shares is ownership in the company. Investing in common shares means owning a (very small) piece of a company. Ownership is important as it allows the investor to benefit from growth in the company. Besides, another characteristic is it can participate in Corporate Success. As a common shareholder of a public company, you may directly and indirectly share in the profits of the company.
Moreover, dividends and capital gain are also the characteristic of common shares. Dividends that the company declares and pays come from the earnings of the company. If the company does well, you can directly benefit by receiving dividends. Normally, there is no right to a dividend for common shareholders (unlike preferred shareholders). But if the company deems it prudent, excess earnings are often paid out to common shareholders. We will look at dividends a little more later, as they are integral to some investors’ strategies. For capital gains, you may indirectly share in the company’s success by the value of your stock increasing. A change in the share value has many causes. Earnings – current, but more importantly the expected future earnings – is a major determinant of share price. If the earnings outlook appears rosy relative to competitors, other companies, other asset classes, etc., the share price should increase. We will review the factors that impact share valuations later.
Besides that, common shares have limited liability. A corporation is an individual legal entity, separate from its shareholders. Think of companies the same as you would think of a person. A corporation, as represented by its officers and Board of Directors, may enter into business contracts, buy or sell assets, borrow or issue debt, develop new products, and so on. The corporation itself is responsible for its actions. And, in today’s business world, the company’s