Wednesday, September 23, 2009

Common stock

The most important from of corporate stock is common stock. Like all forms of equity, common stock represents a residual claim against the assets of the issuing firm, entitling the owner to a share in the net earnings of the firm when it is profitable and to a share in the net market value (after all debts are paid) of the company's assets if it is liquidated. By owning common stock the investor is subject to the full risks of ownership, which means that the business may fail or its earnings may fall risks of ownership, which means that the business may fail or its earning may fall to unacceptable levels, however, the risks of equity ownership are limited since the stockholder is liable only for the amount of his or her investment of funds.
If a corporation with out standing shares of common stock is liquidated, the debts of the firm must be paid first from any assets available. The preferred stockholders then receive their contractual share of any remaining funds. The residual, whatever is left, accrues to common stockholders on a pro rate basis. Unlike many debt securities, common stock is generally a registered instrument with the holder's name recorded on the issuing company's books.
The volume of stock that a corporation may issue is limited by the terms of its charter of incorporation. Additional shares beyond those authorized by the company's charter may be issued only by amending the charter with the approval of the current stockholders. Some companies have issued large numbers of corporate shares, reflecting not only their need for large amounts of equity capital, but also a desire to broaden their ownership base across millions of shareholders. For example, American Telephone and Telegraph (AT&T) have more than 700 million shares of common stock listed on the New York stock exchange. International business machines (IBM) lists more than 580 million shares.
The par value of common sock is an arbitrarily assigned value printed on each stock certificate. Par is usually set low relative to the stock's current market value. In fact, today some stock is issued without any par value. Originally, par value supposed to represent the owners´ original investment per share in the firm. The only real significant of par today is that the firm cannot pay any dividends to stockholders which would reduce the company ´s net worth per share below the par value of its stock . In addition, in the event of liquidation or bankruptcy, the common stockholders may be liable under some circumstances to creditors of the firm for the difference between par value and the subscription price of the stock.
Common stockholders are granted a number of rights when they buy a share of equity in a business corporation stock. Stock ownership permits them to elect the company's board of directors which, in turn, chooses the firm's officers responsible for day-to-day management of the company. Most companies grant a preemptive right when stock is purchased (unless specifically denied by the firm's charter ) which gives the individual shareholder the right to purchase any new voting stock, convertible bonds, or preferred stock issued by the firm in order to maintain his pro rate share of ownership. For example, if a stockholder holds 5 percent of all shares outstanding and 500 new shares are issued, this stockholder has the right to subscribe to 25 new shares.
While most common stock grants each shareholder one vote per share, nonvoting common is also issued occasionally. Some companies issue class a common which as voting rights and class B common which has a prior claim on earnings but no voting power. Te major stock exchanges do not encourage publicly held firms to issue classified common stock, but classified shares are used extensively by privately held firms.
A right granted to all common stockholders is the right of access to the minutes of stockholder meetings and to lists of existing shareholders. This gives the stockholders some power to reorganize the company if existing management or the board of directors is performing poorly. Common stockholders may vote on all matters which affect the firm's property as a whole, such as a merger, liquidation, or the issuance of additional equity shares. This vote may be cast in person or by revocable proxy (which is a temporary assignment of voting power and an instruction on how to vote) granted to a trustee.

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