Definition
Common Stock is a type of security which represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common shareholders are on the bottom of the priority ladder for ownership structure, meaning they have rights to a company’s assets only after bondholders, preferred shareholders and other debt holders have been paid in full.
Phonetic
The phonetic pronunciation of “Common Stock” is /ˈkɑː.mən stɑːk/.
Key Takeaways
1.
Ownership Stake: When you purchase common stock, you are buying a portion of ownership in the company. This means you have a stake in the company’s success. If the company does well, the price of the stock tends to rise and you could make a profit.
2.
Voting Rights: Common stockholders often have the right to vote on certain company matters, including electing the board of directors. This gives them some influence over the company’s direction. However, common stockholders’ votes typically don’t carry as much weight as those of the company’s board members or major stakeholders.
3.
Dividend Payments: Some companies choose to reward their common stockholders with dividends, which are a portion of the company’s earnings distributed to stockholders. However, it’s important to note that not all companies do this and when they do, dividend payments aren’t guaranteed. They may vary or be stopped altogether depending on the company’s financial situation.
Importance
Common stock is an important term in business and finance as it represents ownership in a corporation and constitutes a claim on a portion of the corporation’s assets and earnings. Owning common stock in a company often gives the stockholder the right to vote on corporate matters like board elections, mergers, or policy changes. It can also provide a return on investment via dividends, although dividends are not guaranteed. Therefore, it’s an essential form of equity financing, facilitating companies to raise capital, and yielding profit potential to investors. Furthermore, the concept plays a major role in understanding the balance between risk and return in investment decisions.
Explanation
Common stock is an integral part of corporate finance as it is a tool used by companies to raise capital and fund growth. When a business issues shares of common stock, it essentially sells partial ownership in the company to the public. These funds could be used to finance a variety of company objectives, such as expanding operations, investing in research and development, or paying down debt. Depending on the company’s success, common stock investors stand to benefit from stock price appreciation and potential dividend payments.On the investor’s end, common stock serves as an avenue for individuals and institutional investors to invest in a corporation and thereby gain a stake in its future profitability. Common shareholders indirectly participate in the company’s decision-making process via voting rights at the company’s annual general meeting, which often includes electing the board of directors. Moreover, common stock allows for a high return on investment through capital gains if the company performs well, although it also exposes investors to a higher risk if the company does not do well. For these reasons, investment in common stocks can be a major component of an individual’s or institution’s investment portfolio.
Examples
1. Apple Inc.: Apple Inc. issues shares of common stock that are publicly traded on the NASDAQ. They provide shareholders with voting rights, and the value of the stock fluctuates based on Apple’s profitability, market perception, and broader market trends. 2. Walmart Inc.: As a publicly traded company, Walmart has common stock that is traded on the New York Stock Exchange (NYSE). Owning a share of Walmart common stock would entitle a person to a proportionate stake in Walmart’s assets and profits.3. Amazon.com, Inc: Amazon’s common stock is traded on the NASDAQ. Shareholders have the potential to earn dividends and capital gains based on the performance of Amazon’s business. They also have standards voting rights at Amazon’s annual meeting.
Frequently Asked Questions(FAQ)
What is common stock?
Common stock is a type of security that represents ownership in a corporation. Shareholders typically have the right to vote on company issues, including selection of the board of directors, and may receive dividends.
What is the difference between common stock and preferred stock?
While both forms of stock represent ownership, common stockholders have voting rights in the company and may benefit from capital appreciation and dividends, but they are last to claim any remaining assets in bankruptcy. Preferred shareholders, on the other hand, do not usually have voting rights, but they have higher claim on assets and earnings, including at liquidation.
How do common stocks generate profit for investors?
Investors can profit from common stocks in two ways: through capital gains when the stock’s price increases, and from dividends issued by the company.
What are the risks associated with investing in common stocks?
The major risk is the potential for loss if the company underperforms or goes bankrupt, and the stock’s price decreases. Other risks include volatility in the stock market, economic downturns, and company-specific issues like poor management.
How do I buy common stock?
Common stock can be purchased through brokerage accounts, Direct Stock Purchase Plans (DSPPs), at initial public offerings (IPOs), or through other market transactions.
What are dividends in relation to common stock?
Dividends are a portion of the company’s profits distributed to shareholders. Not all companies offer dividends, and those that do may not offer them consistently. The decision to issue dividends is typically made by the company’s board of directors.
What happens to common shareholders if a company goes bankrupt?
In a bankruptcy, common shareholders are last in line to receive any remaining assets after all debts and other obligations have been paid. In other words, common shareholders face the highest risk of losing their investment if a company fails.
Are there voting rights associated with common stock?
Yes, generally common stockholders are given voting rights proportional to the number of shares they own. These votes can influence the company’s policies and major corporate decisions.
Related Finance Terms
- Dividends
- Shareholders
- Earnings Per Share (EPS)
- Price-Earnings (P/E) Ratio
- Outstanding Shares
Sources for More Information
