Common stock

Definition

Common stock represents ownership in a corporation and constitutes a claim on a portion of the company’s assets and earnings. Holders of common stock typically have voting rights, allowing them to influence corporate governance, such as electing the board of directors. This type of equity security is fundamental to the structure of corporate financing and investment markets.

5 Must Know Facts For Your Next Test

1. Common stockholders have the right to vote on important corporate matters, such as mergers or changes to corporate policy.
2. The value of common stock can fluctuate significantly based on company performance and market conditions, making it a potentially high-risk investment.
3. Common stockholders may receive dividends, but these are not guaranteed and are paid after preferred stockholders have received theirs.
4. In the event of liquidation, common stockholders are paid last, after all debts and preferred shareholders are settled.
5. Investing in common stock can lead to capital gains if the share price increases over time, providing an opportunity for substantial returns.

Review Questions

• How does owning common stock influence a shareholder's role in corporate governance?
  • Owning common stock gives shareholders voting rights, allowing them to participate in key decisions regarding the company's management and direction. This includes voting on matters such as the election of the board of directors, approval of mergers or acquisitions, and changes to corporate bylaws. The ability to vote means that common stockholders can have a direct impact on the governance and operational strategies of the corporation.
• Compare and contrast common stock with preferred stock in terms of rights and financial benefits.
  • Common stock and preferred stock differ primarily in terms of ownership rights and financial benefits. Common stockholders have voting rights and may receive variable dividends based on company performance, while preferred shareholders generally do not have voting rights but enjoy fixed dividends that take priority over common stock dividends. In terms of liquidation, common stockholders are last in line to be paid after debts and preferred shareholders, which increases their risk compared to preferred stockholders.
• Evaluate how fluctuations in common stock prices can impact overall market sentiment and economic conditions.
  • Fluctuations in common stock prices can significantly influence overall market sentiment by affecting investor confidence. Rising prices often signal economic growth and can encourage investment, leading to more capital flowing into the market. Conversely, declining prices may indicate economic uncertainty or poor company performance, which can lead to decreased consumer spending and overall economic slowdown. This interconnectedness highlights how common stock movements can serve as barometers for broader economic trends.

Related terms

preferred stock: A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, often providing fixed dividends but usually without voting rights.

dividends:

Payments made by a corporation to its shareholders, typically derived from profits, which can be distributed in cash or additional shares of stock.

stock market: A marketplace where shares of publicly traded companies are bought and sold, facilitating the trading of common and preferred stocks among investors.