Definition
Common stock is a type of equity security that represents ownership in a corporation. Shareholders of common stock have a residual claim on the company’s assets and earnings, meaning they are entitled to what remains after all debts, liabilities, and preferred shareholder claims are satisfied. Common shareholders typically have voting rights in corporate governance and may receive dividends, although these are not guaranteed. It is the most widely issued stock form and is commonly traded on public exchanges such as the NYSE and Nasdaq.
Understanding How Common Stock Works
Ownership and Voting Rights
Holding common stock makes you a part-owner of a corporation. Most common shares carry voting rights, allowing shareholders to vote on corporate decisions, such as electing the board of directors or approving significant transactions. Voting may occur at annual shareholder meetings or by proxy.
Claim on Profits and Assets
Common shareholders may receive dividends, which are paid at the discretion of the board of directors and depend on the company’s profitability. In liquidation, common shareholders are last in line to receive any remaining assets after creditors and preferred shareholders.
Market Trading
Common stock is traded on stock exchanges, and its price fluctuates based on market conditions, company performance, investor sentiment, and broader economic factors. Stocks are categorized by market capitalization—large-cap, mid-cap, and small-cap—reflecting the size and investment risk profile of the issuing company.
Types of Common Stock
While “common stock” typically refers to standard voting shares, companies may issue multiple classes of common stock with varying voting rights:
- Class A shares may carry full voting rights.
- Class B or non-voting shares may have restricted or no voting rights.
- Dual-class structures, like those used by companies such as Alphabet Inc. (GOOG/GOOGL), allow founders to retain control through enhanced voting shares.
Common Stock vs. Preferred Stock
| Feature | Common Stock | Preferred Stock |
| Voting Rights | Typically included | Usually not included |
| Dividends | Not guaranteed; varies by company | Often fixed and prioritized |
| Liquidation Priority | Last to be paid | Paid before common stockholders |
| Volatility | More volatile | Less volatile due to fixed income |
| Growth Participation | Full participation in capital appreciation | Limited to fixed dividends |
| Convertibility | Cannot convert to other securities | Often convertible into common stock |
Benefits of Common Stock
Potential for Capital Gains: Common stockholders benefit from stock price appreciation over time, which can generate significant long-term returns.
Voting Power: Allows shareholders to participate in key corporate decisions, promoting transparency and corporate accountability.
Liquidity: Common stocks are frequently traded, offering flexibility and access to cash when needed.
Dividend Potential: While not guaranteed, common stock may pay dividends that can provide additional income.
Risks and Considerations
Lower Claim in Liquidation: In bankruptcy, common shareholders are the last to receive any remaining assets, often resulting in total loss.
Dividend Uncertainty: Dividends are discretionary and may be reduced or skipped during financial downturns.
Price Volatility: The prices of common stocks fluctuate sharply, especially for small-cap or growth companies.
Dilution Risk: Issuing additional stock can dilute the ownership percentage and voting power of existing shareholders.
Common Stock in Corporate Finance
Initial Public Offerings (IPOs)
Common stock is often first issued through an initial public offering (IPO) when a private company goes public to raise capital. Underwriters help determine the stock price and manage its sale on public markets.
Stockholder Equity on the Balance Sheet
Common stock appears under the shareholders’ equity section of a company’s balance sheet. This includes the par value of issued shares and additional paid-in capital.
Investing in Common Stock
Investors may choose common stock as part of a diversified portfolio for:
- Growth stocks: Companies are expected to grow their earnings quickly; they may offer higher returns but often have lower or no dividends.
- Value stocks: Typically underpriced relative to fundamentals and often offer dividends.
- Market cap categories:
- Large-cap: Established companies, lower risk.
- Mid-cap: Balance of growth and stability.
- Small-cap: Greater growth potential, higher volatility.
Common stock investments can be made through individual stock purchases, mutual funds, or exchange-traded funds (ETFs).
Common Stock and Shareholder Rights
- Voting on Governance: Most common shares offer one vote per share. Shareholders vote on board elections, mergers, and other major actions.
- Right to Inspect Records: Shareholders can request access to specific corporate records under state laws.
- Right to Transfer Ownership: Common stock can be sold or transferred freely, subject to insider trading rules or restricted stock agreements.
Regulation and Legal Considerations
SEC Oversight
In the U.S., the Securities and Exchange Commission (SEC) regulates public companies issuing common stock. They must provide regular financial disclosures, including 10-K and 10-Q filings.
State Corporate Laws
Shareholder rights and corporate governance standards are often defined by the state where a company is incorporated, commonly Delaware.
Tax Considerations
- Capital Gains Tax: Profits from selling common stock are subject to capital gains tax.
- Dividend Taxation: Qualified dividends may be taxed at lower rates than ordinary income.
Common stock is a foundational element of equity investing, offering ownership in a company, potential dividends, and voting rights. While it carries more risk than bonds or preferred stock—especially in the event of liquidation—it also provides the most incredible opportunity for capital appreciation. Investors seeking long-term growth and an active role in corporate decision-making often choose common stock as a core component of their portfolio.
