Common Stock

Business, Legal & Accounting Glossary

Definition: Common Stock


Common Stock

Quick Summary of Common Stock


Common stock is a security representing a legal claim to a percentage of a company’s earnings and assets. Holders of common stock have some input into choosing company management, but do not generally have much say in the day to day operations. If the common stock is publicly traded, the company will generally be required to meet regulatory obligations such as filing audited financial reports. Holders of common stock are also offered the chance to participate in an annual meeting, where the company may share its vision for the future. Investors may purchase a common stock if they believe a company will be worth more in the future than it is valued at in the present. Common stock does not always pay a dividend. If the company goes bankrupt, common stockholders generally lose their entire investment.




What is the dictionary definition of Common Stock?

Dictionary Definition


n. stock in a corporation in which dividends (payouts) are calculated upon a percentage of net profits, with distribution determined by the board of directors. Usually holders of common stock have voting rights. These are distinguished from preferred stock in which the profits are a predetermined percentage and are paid before the common shareholders who gamble on higher profits, and collectively have voting control of the corporation.


Full Definition of Common Stock


Common Stock is a term that is used to define the ownership of an individual on part of a company.

It is also referred to as corporate equity ownership which is a type of security.

Common Stock is also referred to as voting shares or just ordinary shares in many markets around the world. Common Stock is a term which is commonly used in United States markets.

Common Stock differs from preferred stock. If a company has common stock and preferred stock then the common stock would come after preferred stock when it comes to dividend payout. Only once preferred stocks are completely paid dividends then common stock would be considered.  In case a company declares insolvency or bankruptcy then common stockholders would be considered last when it comes to liquidating the assets common stockholders comes after creditors, employees, bondholders and preferred stockholders.

Common Stockholders hold the right to know the profit and loss accounts of a company and also have voting rights when it comes to crucial decisions such as choosing the board of directors. A company can have voting and non-voting Common Stock. Common Stock Holders do have a right over the company decisions. They have a right to vote on any stock split programs, stating corporate objectives and company policies. Also, some have preemptive privileges, which allow them to keep their proportionate ownership in a corporation ought it to issue additional stock offering.  There is no guarantee on the dividend to be paid to the common stockholders. The returns to such common stockholders are not fixed and depend on many factors like company performance, reinvestment and also on the market value.


Related Phrases


Equity
Preferred stock
Security


Common Stock FAQ's


What Is Common Stock?

Common stock is a security that represents ownership in a company.

Common stock confers on its owners equity in a company, which includes voting rights and a share of the company’s profits through dividends and/or capital appreciation. Common stockholders usually receive one vote per owned share to elect members of the company’s board of directors.

Common stock has the least priority when it comes to ownership in the company. When a company is liquidated or restructured, common shareholders often receive little or nothing after creditors, debt holders, and preferred shareholders are paid. Because of this, common stock is riskier than bonds or debt, but they typically return more than either bonds or debt.

What Is Equity?

Equity is an ownership interest in something. When a homeowner makes payments on his mortgage, he is said to “build equity” in the house. With each payment, his ownership interest increases as that of the mortgagee decreases. Equity is capital.

If an asset is owned by multiple parties, each owner’s equity is called a share in that asset. A stock is a security representing a share in a corporation. The words “stocks,” “equities” and “shares” are often used synonymously, although the last denotes a more general concept.

When a corporation is first formed, investors contribute capital. Collectively, they own the corporation, and they receive stock representing their ownership interest. The investors are called stockholders or shareholders. The stock of the corporation is divided into equal shares, so an investor’s ownership is proportional to the number of shares he holds. Usually, the capital investors first contribute to a corporation is in the form of cash. It could also be in the form of goods or services. For example, employees in a startup corporation sometimes receive stock as part of their compensation—their contribution is in the form of “sweat equity.”

In any sort of joint ownership situation, the rights of individual owners must be balanced against a need to safeguard the interests of other owners. For example, it may be in the best interest of all shareholders that individual shareholders are prohibited from trespassing on company property or having access to company trade secrets. Accordingly, shareholders have limited rights that include:

  • voting rights: Shareholders elect members of the board of directors. They also may vote on certain issues affecting the corporation. Voting is generally conducted on a one-share-one-vote basis. Shareholders may appoint proxies to exercise voting rights on their behalf.
  • dividends: When a corporation earns profits, these may be reinvested in the corporation or paid out to shareholders as dividends. Usually, dividends are paid quarterly as an amount of cash per share.
  • transferability of shares: Shareholders may sell or otherwise legally transfer their shares to a third party of their choosing. Many stocks are actively bought and sold in stock markets.
  • residual claim: If a corporation is liquidated, the corporation’s assets are applied to satisfy outstanding claims against the corporation—indebtedness, employee salaries, taxes, contractual obligations, etc. Shareholders have a residual claim on the assets. Any assets left over after all other claims have been met belong to them. Generally, those residual assets are liquidated, and the proceeds are distributed to shareholders as a fixed payment per outstanding share.

Another fundamental aspect of stock is the fact that owners enjoy limited liability. The corporation’s liabilities are not their liabilities, so creditors of the corporation can not pursue shareholders to satisfy their claims against the corporation. For this reason, shareholders can lose no more than the capital they paid to acquire their stock. Shares can never have a negative market value.

While it is not the norm, some corporations issue multiple classes of stock. They may issue what is known as preferred stock. To distinguish preferred stock from regular stock, we call the latter common stock.

Preferred stock is a form of hybrid security that blends aspects of stocks and bonds. Unlike common stock, whose dividend varies with the corporation’s fortunes, preferred stock pays a fixed dividend. This is subordinate to other claims on the corporation, so the corporation cannot pay dividends on preferred stock unless it is current in meeting all claims of debtors, tax authorities, employees, etc. However, preferred dividends are superior to the claims of common stockholders, who can only receive a dividend when preferred dividends are also paid in full.

Rarely will a corporation issue multiple classes of common stock. When they do, it is usually to concentrate voting rights in one of the classes. For example, founders of a corporation might issue themselves one class of common stock and give another class to other equity investors.


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Definition Sources


Definitions for Common Stock are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 29th December, 2021 | 0 Views.