Common Stocks: Features, Benefits and Taxation

Common stocks are the foundation of equity investing. When individuals think about buying shares in a company, they are usually referring to common stocks. These instruments not only allow investors to become partial owners of a company but also enable them to participate in its growth and decision-making processes. In this guide, we will break down how common stocks work, their features, benefits, and the associated tax rules in India.

What are Common Stocks?

Common stocks, also known as equity shares, represent ownership in a company. When you purchase a common stock, you own a small portion of that company and become a shareholder. This ownership comes with certain rights, including voting rights in company matters and the potential to earn dividends.

The value of a common stock fluctuates with the company's performance and broader market conditions. If the company grows and becomes more profitable, the value of its shares typically increases, benefiting shareholders.

How Common Stocks Work

When a company wants to raise capital, it can issue shares to the public through an initial public offering (IPO). Investors who buy these shares become common shareholders. These shares are then traded on stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).

Shareholders can earn returns through:

• Capital appreciation: An increase in share price over time.

• Dividends: Periodic payouts from the company’s profits, though not guaranteed.

• Bonus or rights issues: Additional shares offered under certain conditions.

Shareholders also get voting rights on major corporate decisions, such as mergers, acquisitions, or changes in the board of directors.

Features of Common Stocks

Here are some key characteristics that define common stocks:

• Ownership: Common stocks provide partial ownership in the company.

• Voting rights: Shareholders typically get one vote per share on corporate matters.

• Dividends: These are not fixed or guaranteed and are paid only at the discretion of the company.

• Residual claim: In case of liquidation, common shareholders are paid after all debts and preferred shareholders are settled.

• Transferability: Shares can be bought and sold easily on the stock exchange.

• Growth potential: Common stocks often benefit from capital appreciation over time.

• Transparency: Publicly listed companies disclose financial information regularly, enhancing investor trust.

Benefits of Common Stocks

Investing in common stocks offers several potential advantages:

• Wealth creation: Over the long term, equities have historically outperformed many other asset classes.

• Liquidity: Stocks are easily tradable, offering flexibility to enter or exit positions.

• Dividends: While not guaranteed, dividends can provide an additional income stream.

• Portfolio diversification: Including stocks in a diversified portfolio helps manage overall investment risk.

• Ownership perks: Shareholders may receive invitations to annual general meetings and access to company updates.

• Market participation: Investors can take part in a company's growth and profitability.

Common Stock vs Preferred Stock

The key difference between common and preferred stocks lies in the benefits and rights they offer:

Common stocks offer higher growth potential but come with more risk, while preferred stocks are more stable with fixed returns but limited upside.

Pros and Cons of Common Stock

Investing in common stocks comes with both advantages and drawbacks. It is essential to understand both sides to make well-informed decisions that suit your financial goals and risk tolerance.

Common Stock Advantages

• High return potential: If the company performs well, share prices can rise significantly.

• Voting power: Shareholders influence major company decisions.

• Market accessibility: With platforms like FYERS, anyone can invest in stocks with ease.

• Transparency: Publicly listed companies are regulated and must disclose financial information regularly.

• Flexible investment amounts: Investors can start with relatively small amounts.

• Ease of monitoring: Real-time access to stock prices and company news helps investors stay updated.

Common Stock Disadvantages

• Market risk: Prices can be highly volatile due to market and economic factors.

• Dividend uncertainty: Not all companies pay dividends consistently.

• Residual claim: In bankruptcy, common shareholders are the last to be paid.

• Emotional investing: Price fluctuations may lead to impulsive decisions.

• Short-term losses: Temporary dips in share prices can lead to unrealised losses.

• Lack of guaranteed returns: Unlike fixed-income instruments, there is no assured income.

How to Invest in Common Stocks in India

To start investing in common stocks, follow these steps:

1. Open a Demat and trading account: Use a SEBI-registered broker like FYERS.

2. Complete KYC formalities: Provide PAN, Aadhaar, bank details, and other documents.

3. Fund your trading account: Transfer funds securely from your bank.

4. Research companies: Study financials, business models, and market conditions.

5. Place orders: Use limit or market orders based on your strategy.

6. Monitor and review: Track your portfolio and rebalance if needed.

Investors can also invest via exchange-traded funds (ETFs) or mutual funds that include common stocks.

For beginners, starting with blue-chip companies or index-based investments can help manage risk while gaining market exposure.

Taxation on Common Stocks in India

Tax rules on gains from common stocks depend on the holding period:

• Short-Term Capital Gains (STCG): If shares are sold within 12 months, gains are taxed at 15%.

• Long-Term Capital Gains (LTCG): If held for more than 12 months, gains over ₹1 lakh per financial year are taxed at 10% without indexation.

• Dividends: Taxed as per the investor’s income tax slab.

Note: Securities Transaction Tax (STT) applies on both buying and selling of listed equity shares.

Also, investors should maintain proper documentation for tax filing purposes, including contract notes and brokerage statements.

Conclusion

Common stocks provide a pathway to ownership in some of India’s top companies while offering the potential for long-term wealth creation. They come with risks, but with careful planning and diversification, they can play an important role in your financial journey. Whether you are a beginner or a seasoned investor, understanding how common stocks work can help you make more informed decisions.