Common Stock, also known simply as “common shares,” represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. They are at the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders, and other debt holders are paid in full.
Definition of Common Stock
Common Stock can be defined as equity ownership in a corporation. It grants shareholders specific rights, including voting rights, dividends (if declared), and the potential for capital appreciation. Common shareholders are considered both part owners of the corporation and bearers of the associated rights and risks.
Characteristics of Common Stock
Voting Rights
Common shareholders typically have the right to vote in the election of the board of directors and on other key corporate matters. Each share usually entitles the holder to one vote.
Dividends
While common shareholders may receive dividends, these are not guaranteed and are typically paid after preferred shareholders have received their dividends.
Capital Appreciation
Common stocks have the potential for capital appreciation, meaning the value of the stock can increase due to the corporation’s success and profitability.
Risk
Common stock carries more risk than preferred stock and bonds. In the event of a corporation’s liquidation, common shareholders are the last to receive any remaining assets, after all debts and preferred shareholders have been paid.
Types of Common Stock
There is typically only one basic type of common stock, but classifications can vary slightly between companies based on voting rights:
- Class A Shares: Often, these offer more voting rights per share compared to other classes.
- Class B Shares: These might offer fewer voting rights or no voting rights at all.
Historical Context
Common stock has been a fundamental component of the modern financial system since the founding of the first stock exchanges in the 17th century. The development and proliferation of common stock have provided companies with a critical means of raising capital and have offered investors opportunities to own portions of businesses and benefit from their growth.
Examples
- Apple Inc. (AAPL): Apple’s common stock is one of the most widely held and traded stocks in the world.
- Microsoft Corporation (MSFT): Similar to Apple, Microsoft’s common shares are a staple in many investment portfolios.
- Tesla Inc. (TSLA): Known for its high volatility, Tesla’s common stock is a prime example of the potential for high capital appreciation and risk.
Applicability and Considerations
Investment Strategy
Investors who buy common stock do so for various reasons, including dividend income, voting rights, and the potential for capital growth. Portfolio diversification often involves a combination of common stocks from various sectors.
Market Volatility
The performance of common stock can be tied to general economic conditions, market sentiment, and company-specific factors, making it inherently volatile.
Dividends
Not all companies pay dividends on their common stock. Some might reinvest earnings to promote growth, while others may distribute a portion of profits to shareholders.
Related Terms
- Preferred Stock: A type of stock that gives holders preferential treatment in terms of dividends and liquidation claims but typically lacks voting rights.
- Equity: Represents ownership in a company, encompassing both common and preferred stock.
- Bond: A debt instrument representing a loan made by an investor to a borrower (corporate or governmental).
FAQs
What are the risks associated with common stock?
Can common shareholders influence company decisions?
Do all companies pay dividends on common stock?
References
- “Investing in Stocks - A Primer,” Investopedia.
- “Corporate Finance,” Ross, Westerfield, Jaffe.
- “The Intelligent Investor,” Benjamin Graham.
Summary
Common Stock represents ownership in a corporation and grants shareholders voting rights and the potential for dividends and capital appreciation. It is a critical component of the modern financial ecosystem, providing companies with a means to raise capital while offering investors opportunities for portfolio growth. However, it comes with inherent risks, including market volatility and low priority in asset claims during liquidation. Understanding these aspects can help investors make informed decisions.
