Common stock

Definition

Common stock represents ownership in a corporation and comes with voting rights, allowing shareholders to influence company decisions. Investors holding common stock may receive dividends, which are a share of the company’s profits, but these payments are not guaranteed. This type of equity is often seen as more volatile than preferred stock but offers potential for higher returns through capital appreciation and participation in the company's growth.

5 Must Know Facts For Your Next Test

1. Common stockholders have voting rights, usually allowing them to vote on important company matters such as board elections and mergers.
2. Dividends for common stock are declared at the discretion of the company's board of directors and can vary based on company performance.
3. Common stock is typically considered riskier than preferred stock due to its volatility and lower claim on assets during liquidation.
4. If a company goes bankrupt, common stockholders are last in line to receive any remaining assets after all debts and obligations are paid.
5. Investing in common stock provides investors with potential capital gains, especially if the company's value increases significantly over time.

Review Questions

• How do common stock and preferred stock differ in terms of shareholder rights and dividend payments?
  • Common stockholders have voting rights, allowing them to participate in key corporate decisions, while preferred stockholders usually do not have these rights. When it comes to dividends, common stock dividends are variable and not guaranteed, as they depend on company performance and board decisions. In contrast, preferred stock often provides fixed dividends that must be paid before any common stock dividends can be issued, making preferred stocks less risky in terms of dividend income.
• Analyze the advantages and disadvantages of investing in common stock compared to other types of securities.
  • Investing in common stock offers several advantages, such as the potential for high capital appreciation and the ability to influence corporate governance through voting rights. However, it also comes with disadvantages, including higher volatility and increased risk, especially during economic downturns. Unlike bonds or preferred stocks that may provide fixed income, common stocks do not guarantee dividends, making them less secure as an investment option during uncertain times.
• Evaluate how market conditions can impact the performance of common stocks and what investors should consider when investing.
  • Market conditions play a critical role in determining the performance of common stocks. Factors such as economic growth, interest rates, and investor sentiment can influence stock prices significantly. During bullish markets, common stocks often perform well due to increased investor confidence leading to higher demand. Conversely, during bearish markets or economic downturns, common stocks can suffer sharp declines as investors become risk-averse. Therefore, investors should consider diversifying their portfolios and staying informed about market trends to make educated decisions about when to buy or sell their shares.

Related terms

dividends: Payments made by a corporation to its shareholders, usually as a distribution of profits.

preferred stock:

A type of equity security that typically offers fixed dividends and has priority over common stock in asset liquidation but generally lacks voting rights.

capital appreciation: An increase in the value of an asset or investment over time, which common stockholders may benefit from as the company grows.