Earnings per share on common stock can be properly understood by knowing its components. Common stocks are securities, which tantamount to equity ownership. They provide voting rights in addition to access to company fortunes. Earnings per share is a ratio, which is used for share price evaluation
Characteristics of Common Stock
Companies usually have two types of stocks. They are the common stock and the preferred stock. The common stock provides two main benefits. The revenues earned from the common stocks are in the form of dividends and appreciation of capital. Dividends are taxable.
They are distributed among the company shareholders from the company’s retained earnings or current earnings. Payments of dividends are made on a quarterly basis. These payments are usually made in cash.
However , dividends can also be disbursed in the form of property or even stock. Since the payment of dividends depends on the company’s ability to earn profit, it is not guaranteed.
Capital appreciation is said to have occurred when there is an increase in the stock value, over and above the amount paid for its purchase. Due to this increment in stock price the stockholder earns a profit. Obviously the profit is realized once the stock holder sells his stock at the ongoing market value. This is capital appreciation.
One formidable plus point of common stock is that they give the holders voting power. The shareholders can vote in the company elections and on various issues including leadership. The norm here is that one share equals to one vote.
If the concerned company faces liquidation the demands of the common stockholders are addressed after the demands of the bondholders, debt holders and preferred stock holders have been met.
The common stockholders are also entitled to preemptive rights. By exercising these rights, the common stock holders can retain their proportional ownership ratio even when the company issues another new stock offering . Exercising this right is not mandatory for the common stock holder – it just means that he has the option.
Earnings Per Share
Earnings Per Share is a statistical measure used in share market calculations. It aids in evaluating share price. It is a ratio, which is obtained by dividing the net income by the total quantity of outstanding shares. Earnings per share provides an idea about a company’s growth over a time frame. For investment in a company the shareholders would definitely look at the growth of the company’s earnings. So it is easy to understand the importance of earnings per share on common stock.