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What is Common Stock?

2016-12-08T13:22:22+00:00

The term 'Common Stock' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Common stocks are shares in an underlying company that represent equity ownership in the corporation. They are also known as ordinary shares. These are securities in which individuals invest their capital. Common stock is the opposite of preferred stock.

While common stock and preferred stock both represent ownership in the company, there are many important differences between the two. Should a company go bankrupt, common stock holders are only given their money after preferred stock owners, bond owners, and creditors. Yet, common stock performs well, typically seeing greater levels of price appreciation than does preferred stock.

Common stock typically comes with voting rights, another feature that preferred stock does not have. These votes are used in electing the board of directors at the company’s annual meeting, as well as in determining such things as company strategy, stock splits, policies, mergers and acquisitions, and the sale of the company. Preemptive rights in common stocks refer to owners with these rights being allowed to keep the same proportion of ownership in the company’ stock, even if it issues additional stock.

Common stocks do not always pay dividends to share holders, as preferred stocks typically do. The dividends of common stocks are not pre-set or fixed. This means that the dividend returns are not completely predictable. Instead, they are based on a company’s reinvestment policies, earnings results, and practices of the market in the valuing of the stock shares themselves.

Common shares have various other benefits. They are typically less expensive than are preferred stock shares. They are more heavily traded and readily available as well. The spreads between the buying and selling prices on them tend to be tighter as a result. Common stocks generally provide capital appreciation as the price of the shares rises over time, assuming that the company continues to do well and meet or exceed expectations. Dividends are often paid to common share holders when these things prove to be the case.

Common stocks can be purchased in any denominated amount. Round lots of common stocks are sold by even one hundred share amounts. This means that five hundred shares of common stock would be considered to be five lots of common stock.

Common stocks represent principally capital gains types of investments, as an investor is looking to buy them low and sell them at a higher price. This leads to a capital gain when the stock is sold at this greater level. The capital gain is the difference between the selling price and the purchasing price. Common stocks can also be cash flow types of investments when they pay a reliable stream of dividends every quarter. These income amounts are typically smaller than the one time amounts realized in capital gains, though they are obtained four times per year on a quarterly basis, or occasionally more often on a monthly basis.

The term 'Common Stock' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.