Common Stock

Definition

Common stock represents ownership in a corporation, giving shareholders voting rights and the potential to receive dividends. It is a key component of stock acquisitions, as acquiring common stock in a company allows investors to gain a stake in the company's assets and profits. Shareholders with common stock may benefit from capital appreciation if the company's value increases over time, but they also bear more risk since they are last in line to be paid in case of liquidation.

5 Must Know Facts For Your Next Test

1. Common stockholders have voting rights, allowing them to influence corporate decisions such as electing the board of directors.
2. In times of financial trouble, common stockholders are last to be compensated during liquidation, making their investment riskier compared to preferred stockholders.
3. The value of common stock is directly tied to the performance and profitability of the company, which can lead to significant fluctuations in share price.
4. Companies may choose to reinvest profits back into the business rather than paying dividends, which could affect the attractiveness of their common stock to investors.
5. Acquisitions involving common stock can dilute existing shareholders' ownership percentage if new shares are issued to fund the acquisition.

Review Questions

• How does owning common stock provide shareholders with influence over corporate governance?
  • Owning common stock gives shareholders voting rights, allowing them to participate in important decisions such as electing board members and approving major corporate actions. This democratic process enables common stockholders to influence the direction and management of the company. Their ability to vote reflects their ownership stake and interest in seeing the company thrive, aligning their interests with those of other stakeholders.
• Compare and contrast common stock with preferred stock regarding risk and benefits for investors.
  • Common stock typically offers greater potential for capital appreciation and voting rights, but it comes with higher risk since common stockholders are last in line during liquidation. Preferred stock, on the other hand, provides more stable dividends and priority in asset distribution but usually lacks voting rights. This makes preferred stock less volatile compared to common stock, appealing to more risk-averse investors who prioritize consistent returns over potential growth.
• Evaluate how fluctuations in a company's performance can impact the attractiveness of its common stock during an acquisition.
  • Fluctuations in a company's performance can significantly affect its common stock value and attractiveness during an acquisition. If a company's financial results improve, its common stock may become more desirable due to increased expected dividends and growth potential. Conversely, poor performance could lead to decreased share prices and make the acquisition less appealing for investors. An acquirer must consider these dynamics carefully when assessing whether acquiring common stock will enhance its overall portfolio or carry undue risk.

Related terms

Preferred Stock: A type of stock that gives shareholders preferential treatment when it comes to dividends and asset distribution during liquidation but typically does not have voting rights.

Dividends: Payments made by a corporation to its shareholders, usually derived from profits, which can be issued in cash or additional shares of stock.

Stock Split: A corporate action that increases the number of outstanding shares by issuing more shares to current shareholders, effectively lowering the stock price without changing the company's market capitalization.