What is a Common Stock?
Common stock is a type of security that represents ownership of equity in a company. There are other terms – such as common share, ordinary share, or voting share – that are equivalent to common stock.
Holders of common stock own the rights to claim a share in the company’s profits and exercise control over it by participating in the elections of the board of directors, as well as in voting regarding important corporate policies.
Common stock owners can profit from the capital appreciation of the securities. On average, common shares offer a higher return relative to preferred stock or bonds. However, the higher returns come with the higher risks associated with such securities.
The main sources of shareholder rights are legislation in the company’s incorporation, corporate charter, and governance documents. Therefore, the rights of shareholders can vary from one jurisdiction to another and from one corporation to another.
Nevertheless, there are a few shareholder rights that are almost uniform for every corporation. First, the right of shareholders to claim a portion of the company’s profits. The shareholders usually receive a portion of profits through dividends. In addition, in case of a company’s liquidation, holders of common stock own rights to the company’s assets. However, since common shareholders are at the bottom of the priority ladder, it is very unlikely that they would receive compensation in the event of liquidation.
Moreover, common shareholders can participate in important corporate decisions through voting. They can participate in the election of the board of directors and vote on different corporate matters such as corporate objectives, policies, and stock splits.
Classifications of Common Stock
There is no unified classification of common stock. However, some companies may issue two classes of common stock. In most cases, a company will issue one class of voting shares and another class of non-voting (or with less voting power) shares. The main rationale for using dual classification is to preserve control over the company.
Despite the difference in voting rights, different classes usually enjoy the same rights to the company’s profits.
Thank you for reading CFI’s guide on Common Stock. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: