Common stock

Definition

Common stock is a type of equity security that represents ownership in a corporation, giving shareholders voting rights and the potential to receive dividends. It is the most prevalent form of stock issued by companies, enabling investors to participate in the company’s growth and profit-sharing. When companies seek funding for expansion or operations, they often issue common stock to raise capital, which connects this concept to investment strategies and corporate finance.

5 Must Know Facts For Your Next Test

1. Common stockholders have voting rights at shareholder meetings, allowing them to influence corporate governance and decisions.
2. In the event of liquidation, common stockholders are last in line to receive any remaining assets after debts and preferred stockholders are paid.
3. The value of common stock can fluctuate significantly based on market conditions, company performance, and investor sentiment.
4. Common stocks often pay dividends, but these are not guaranteed and can be changed or eliminated based on the company's financial situation.
5. Investing in common stock can provide long-term capital appreciation as companies grow and increase their profitability.

Review Questions

• How does owning common stock empower investors in corporate governance?
  • Owning common stock gives investors voting rights that allow them to participate in key decisions about the company’s direction. Shareholders can vote on matters such as electing the board of directors, mergers, or major changes in corporate policy. This democratic aspect of ownership means that common stockholders have a voice in shaping how a company operates and is managed.
• What distinguishes common stock from preferred stock in terms of risk and reward for investors?
  • Common stock carries higher risk compared to preferred stock since common shareholders are last to receive payments in the event of liquidation. However, common stocks offer greater potential for capital appreciation and dividends as they typically reflect the company's performance. While preferred stocks provide fixed dividends and priority during liquidation, they do not allow shareholders voting rights, making common stocks potentially more rewarding but also riskier.
• Evaluate the impact of issuing common stock on a company's capital structure and future growth prospects.
  • Issuing common stock can significantly affect a company's capital structure by providing immediate funding without incurring debt. This influx of capital allows companies to invest in growth opportunities such as expanding operations or launching new products. However, it also dilutes existing shareholders' equity, which can influence share prices. The decision to issue common stock reflects a strategic choice between maintaining control through debt or leveraging equity for expansion, with implications for future growth potential and shareholder returns.

Related terms

preferred stock: A type of stock that provides dividends to shareholders before common stockholders receive theirs and usually does not come with voting rights.

dividends: Payments made by a corporation to its shareholders, typically from profits, which can be in the form of cash or additional shares.

initial public offering (IPO): The process by which a private company offers shares of its stock to the public for the first time, transitioning into a publicly traded company.