What is Common Stock?

Common stock is an equity security that represents ownership in a corporation. Once the common stock has been issued by the corporation, shareholders will own a portion of the company. The owners of the common stock can vote on certain matters, earn dividends if any are issued, and see their investment grow in value.

Companies issue common stock to raise capital without taking on debt. In return, shareholders are given an ownership stake and usually a say in how the company is run. 

Common Stock Explained: Functioning and Mechanism

For a better understanding of common stock, imagine that the company’s equity structure is like a pie. Each unit of common stock is one slice. The more slices you have, the more you have of both the pie and the rights associated with the company.

There are two key advantages that common stockholders get from their holdings:

• Voting rights: The right to vote on important company decisions, including choosing the board members, approving mergers and acquisitions, and making other important decisions regarding strategy. This right normally scales according to the number of shares you own (usually, one vote per unit of stock).
• Upside potential: If the company’s value increases, its stock will rise in price. Also, some companies pay part of their income to their owners as dividends.

Who Are Common Stockholders?

Common stockholders are those people or entities that own common stock; these stockholders could range from founders, employees (through stock grants), early-stage investors, and public investors in case the firm decides to go public.

Here are some characteristics of common stockholders:

• Residual claim on assets: In the case of liquidation of the business entity, common stockholders are paid only after paying all the creditors, bondholders, and preferred stockholders. As such, common stocks carry a higher risk than the other securities.
• No guaranteed return: While bondholders are entitled to regular interest payments, and preferred stockholders to dividends, there is no guarantee of return for common stockholders.
• Dilution of ownership stake: The issuing of new shares by the company dilutes the ownership stake of the common stockholders unless they enjoy anti-dilution rights.

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