Common stock is Bond and common stock

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Shares are securities that are created by joint stock organizations, with no fixed circulation period and giving the right to joint ownership (management) of the enterprise and to receive income as dividends, as well as to the share of property that remains after liquidation measures.

Dividends are a share of the net income of a joint-stock organization, it is distributed among the owners of shares (shareholders) in proportion to the number of shares held.

Types of shares

These securities are divided into ordinary (ordinary) or preference.

An ordinary share is a paper that gives the right to own the property of the issuing enterprise. Their holders can elect persons to the board of directors and influence key issues, take part in the regulation of the organization's income (as dividends).

Preferred shares are documents that grant the right to some privileges compared to the owner of ordinary shares. Privileges can take the form ofstable dividends of established amounts, as well as in the form of a pre-emptive right to receive the balance of the organization's property upon liquidation. However, preferred owners, in exchange for these rights, are usually deprived of their vote at the shareholder meeting. But at the same time, in case of non-payment of dividends, and this is stated in the Charter of the enterprise, preferred shares give the right to vote to their owners before paying dividends.

Additional shareholder rights

In addition, there are additional rights to common shares in the form of their first priority acquisition in the new issue. But again, it depends on the Charter of the society. Consequently, there are many different types of similar securities in one company, which have different sets of rights for their holders.

It should be noted that the shareholder is en titled to receive dividends, but the issuer does not guarantee their mandatory and regular payment. Dividends on common shares, as on preferred shares, are often not paid when creditor obligations are not met, there are losses, or when the payment of dividends can cause losses themselves.

Common stock categories

There are 6 investment types of common shares:

• Blue chips are popular and particularly attractive securities. Elite organizations that fall into this category usually pay dividends over a long period of time, in good and bad periods.

• Growth stocks are those that havean excellent opportunity to increase profits in the future. The profit of the organization is invested in the future development of the production process, and the shareholders are paid either a small amount of dividends, or no payment is made at all. The price of such shares is extremely volatile and often fluctuates faster than the prices of other securities.

• Income stocks are those in which current account earnings compete with fixed income. They usually have a longer history than other securities and stable dividend payouts (above average).

• Cyclical stocks are securities of companies whose income depends on the commercial cycle. In the presence of favorable conditions, income and the price of securities grow rapidly. And vice versa, if the conditions for business become worse, then the profit and the exchange rate, respectively, go down hard.

• Speculative (risky) securities usually come in new issues and with a fairly variable ratio of market price to earnings per share. They do not have consistent success in the market, but they have the potential to increase rates significantly. These stocks are those issued by small businesses in emerging industries, as well as securities that are too cheap.

• Defensive (protected) stocks are those that are stable and safe in floating markets. Their cost is quite stable and decreases least of all with a downward trend in the exchange rate. Mostlysuch papers are issued by food, pharmaceutical and utility organizations for the production of cost-effective products.

Differences between a bond and a common stock

A bond and a common stock have the following differences:

• Bonds can be issued by any commercial enterprise or government. An ordinary share is a security created exclusively by joint-stock companies.

• The value of the bond cannot fall below the initial value, and the shares may fall in price.

• Interest on bonds is often fixed,and dividends on common stock often fluctuate significantly (or not paid at all) depending on the organization's earnings.

• Interest on bonds is paid over a fixed period (it is specified in the contract), while shares generate income indefinitely.

• Bonds are smaller than equities, but more likely to be made.

• Interest on bonds has first priority, that is, they are paid before dividends. Interest is paid by the issuer regardless of the result of economic activity. Lack of profit will not entail any consequences for the organization in relation to the payment of dividends, and the lack of funds to pay interest on bonds forces the organization to sell part of the property or take out a loan to pay off debts.

• Bonds do not confer business management rights. The shareholder, on the other hand, acts as one of the owners of the organization, and when buying a bond, the owner turns into a creditor.

• In the event of liquidation of the enterprise during the division of property, shareholders receive only the share that remains after the payment of all debt obligations, including bonds.

What to choose?

A bond and a common stock are nearly opposite securities when it comes to making a profit. Everyone who wants to purchase these types of securities should conduct a clear analysis of what he wants to receive in the end result.

Common stock price

Buyers of common stocks are interested in their value.

When issuing securities to the market, the owner of the organization sets the share price. Its cost consists of a complex of the nominal price and dividends. Since it is impossible to make a forecast of the development of the issuing organization for an indefinite period, it is impossible to set their price for the future period. Therefore, the value of ordinary shares is the same price that was determined for a specific time period, and it can vary from 5 rubles to several hundred or more, depending on the success of the enterprise.

Favorable acquisition of a block of shares on stock exchanges (including trading floors) can lead to tangible profit for the investor. But there is also a certain risk: there is no guarantee of a stable income. The value of such securities may be affected bydifferent facts: economic instability in the state, exchange rate volatility, a decrease or increase in demand for some goods and services, a change in pro-social management.

Dividends on common shares

An ordinary share is a security that gives the holder the right to participate in the management of the organization at the shareholders' meeting and in the distribution of income. Dividends are paid taking into account the amount of profit of the issuing organization. The amount of the dividend on ordinary shares is calculated by the board of directors and then ratified at the shareholders' meeting. Holders at the meeting have the right to reduce their size. This type of shares are a rather risky investment process, since in the event of liquidation of the organization, shareholders will receive money only after making all payments to creditors and preferred owners.

Profit categories

A joint-stock company reports earnings per share as follows:

• basic earnings per ordinary share, showing share in the reporting period for shareholders;

• Earnings (loss) per security showing a likely decline in underlying earnings per share in a future reporting period (diluted earnings).

Earning formula: net income is equal to preferred dividends divided by the number of ordinary shares outstanding.