Common Stock

A basic type of stock that grants shareholders voting rights and the right to participate in management, providing subordinated claims on a company's profits and residual assets while offering the pot

Common Stock

Overview

Common stock is the most basic form of share issued by a joint-stock company, and is a security that grants shareholders voting rights, dividend rights, and claims on residual assets. As a core component of a company's capital, common shareholders have the right to participate in the management of the company, and while they receive dividends and claims on the company's profits and assets after preferred shareholders, they can expect correspondingly higher returns.

Main Content

Definition and Characteristics of Common Stock

Common stock refers to shares that have no preferential rights in profit distribution or distribution of residual assets. If a company goes bankrupt or is liquidated, common shareholders receive assets after creditors and preferred shareholders, but they can fully enjoy the benefits of the company's growth and increased profits. Common stock accounts for most of the shares issued by a joint-stock company, and is a representative risk asset in which investors' gains and losses are determined by changes in the stock price.

Rights of Common Shareholders

Common shareholders have five main rights. First, they may exercise one vote per share on agenda items at general shareholders' meetings, thereby participating in management. Second, they have the right to receive dividends when the company distributes profits (right to claim profit dividends). Third, they have the right to receive a share of remaining assets when the company is dissolved (right to claim residual assets). Fourth, when the company issues new shares, existing shareholders have the right to be allocated new shares on a preferential basis (preemptive right to new shares). Fifth, they have the right to access information, including inspecting the shareholder registry or accounting books. These rights are key factors that influence corporate management and governance structures.

Comparison of Common Stock and Preferred Stock

The type of stock contrasted with common stock is preferred stock. Preferred stock holds a preferential position in dividends or distribution of residual assets, but voting rights are often restricted. Common stock guarantees voting rights, but is subordinate to preferred stock in dividend priority. Preferred shareholders receive dividends before common shareholders and are often guaranteed a certain dividend rate, making preferred stock suitable for investors who prefer stable returns. Common stock dividends can vary depending on the company's operating performance, making it attractive to investors who seek high returns while taking on higher risk. In South Korea, preferred stock commonly trades at a lower price than common stock, and this has been pointed out as one cause of the so-called "Korea Discount."

Value and Valuation of Common Stock

The value of common stock is assessed based on various factors such as dividends, future cash flows, asset value, and profitability. Representative valuation methods include the dividend discount model (DDM), the capital asset pricing model (CAPM), and relative valuation methods (PER, PBR). The stock price of common stock is more likely to rise when a company's net profit increases or its growth prospects are strong. On the other hand, it has volatility and can fall sharply during poor earnings or an economic downturn. Therefore, common stock investors need the ability to analyze corporate financial statements and industry trends.

Common Stock Investment and Shareholder Return Policies

Recently, corporate shareholder return policies have emerged as an important issue in common stock investment. Shareholder returns mean directly enhancing shareholder profits through dividends and share buybacks and cancellations. Increasing the dividend payout ratio or buying back and canceling treasury shares can raise the value of common stock and boost the stock price. South Korean companies have historically maintained relatively low dividend rates, but the number of companies expanding dividends has increased in recent years. In particular, the corporate value-up program implemented from 2024 encourages companies to improve capital efficiency and expand shareholder returns in order to address undervalued price-to-book ratios (PBR).

Latest Trends

In the 2024-2025 global stock markets, the importance of common stock is being emphasized even more. Both institutional and individual investors are strengthening their participation in management and actively exercising voting rights. In South Korea especially, minority shareholders are increasingly raising their voices in management through active "activist fund" movements, demanding improvements in corporate governance and changes for shareholder interests. In addition, the expansion of non-face-to-face general meetings and electronic voting systems has made it easier for common shareholders to exercise their voting rights. As ESG (environmental, social, and governance) management spreads, there are also more cases in which institutional investors use common stock holdings to pressure companies over sustainability policies. As the government-led value-up program to resolve the Korea Discount gained momentum in 2024, listed companies have disclosed shareholder value enhancement plans and increased dividends, improving investment sentiment toward common stock.

Related Topics

  • [[Preferred Stock]]
  • [[Stock]]
  • [[Korea Discount]]
  • [[Capital Markets Act]]