Common stock

Definition

Common stock is a type of equity security that represents ownership in a corporation and gives shareholders voting rights and the potential to receive dividends. This form of stock is essential to a company's capital structure, as it allows corporations to raise funds for growth while also providing shareholders with a claim on the company's assets and earnings, albeit after creditors and preferred stockholders are paid.

5 Must Know Facts For Your Next Test

1. Common stockholders typically have voting rights in corporate decisions, allowing them to influence matters such as electing the board of directors.
2. Dividends on common stock are not guaranteed; companies may choose to reinvest profits rather than distribute them to shareholders.
3. In the event of liquidation, common stockholders are last in line to receive any remaining assets after all debts and preferred stock obligations have been settled.
4. The value of common stock can fluctuate significantly based on market conditions, company performance, and investor sentiment.
5. Issuing common stock is a primary method for companies to raise capital for expansion, research, and other operational needs.

Review Questions

• How does common stock differ from preferred stock in terms of shareholder rights and company obligations?
  • Common stock differs from preferred stock primarily in shareholder rights and company obligations. Common stockholders have voting rights, allowing them to participate in major corporate decisions, while preferred stockholders typically do not have these rights. Additionally, common stock dividends are not guaranteed and can be suspended at the company's discretion, while preferred stockholders often receive fixed dividends before any payments are made to common shareholders.
• What role does common stock play in a corporation's capital structure, and how does it impact financial decision-making?
  • Common stock plays a vital role in a corporation's capital structure as it represents equity financing that can help fund operations and growth. The issuance of common stock allows companies to raise funds without incurring debt obligations. Financial decision-making is impacted by the need to balance the interests of common shareholders with those of creditors and preferred stockholders, particularly when considering dividend distributions and reinvestment strategies.
• Evaluate the implications of market fluctuations on the value of common stock and how these changes affect investor behavior.
  • Market fluctuations can significantly affect the value of common stock, creating both opportunities and risks for investors. When a company's performance is strong or investor sentiment is positive, common stock prices can rise, attracting more investors looking for capital gains. Conversely, negative news or poor performance can lead to price declines, causing investors to sell off their shares. This volatility influences investor behavior as individuals must consider their risk tolerance and investment strategy in response to changing market conditions.

Related terms

dividends: Dividends are payments made by a corporation to its shareholders, typically in the form of cash or additional shares, representing a portion of the company's earnings.

preferred stock: Preferred stock is a type of equity that has priority over common stock in terms of dividend payments and asset liquidation, often without voting rights.

capital structure: Capital structure refers to the mix of debt and equity financing used by a company to fund its operations and growth.