Common stock

Definition

Common stock represents ownership in a corporation, giving shareholders a claim on a portion of the company's assets and earnings. This type of stock typically comes with voting rights, allowing shareholders to influence corporate decisions, such as electing the board of directors. Common stockholders may receive dividends, but these are not guaranteed and depend on the company's profitability and decisions made by the board.

5 Must Know Facts For Your Next Test

1. Common stockholders have the right to vote on important company matters, such as mergers or changes to corporate governance.
2. In case of liquidation, common stockholders are last in line to receive any remaining assets after all debts and obligations have been paid.
3. The price of common stock can fluctuate significantly based on market conditions, investor sentiment, and the company's performance.
4. Shareholders of common stock may receive dividends, but these are often reinvested back into the company rather than paid out.
5. Investing in common stock can offer potential for capital appreciation, but it also carries risks, as the value can decrease based on various factors.

Review Questions

• What role does common stock play in a corporation's capital structure and how does it affect shareholder rights?
  • Common stock is a key component of a corporation's capital structure as it represents ownership interest in the company. Shareholders of common stock typically have voting rights that allow them to influence corporate decisions, including the election of the board of directors. This ownership also means they have a residual claim on assets and profits, though they stand behind creditors and preferred shareholders when it comes to asset distribution.
• Discuss how the fluctuations in common stock prices can impact both individual investors and the overall economy.
  • Fluctuations in common stock prices can significantly affect individual investors’ portfolios, influencing their investment strategies and financial well-being. When stock prices rise, investors may experience gains and increased wealth, leading to greater spending and investment in the economy. Conversely, declining stock prices can result in losses for investors, which can reduce consumer spending and negatively impact economic growth, creating a cycle that affects overall market confidence.
• Evaluate the implications of investing in common stock versus preferred stock for an investor's risk-return profile.
  • Investing in common stock typically involves higher potential returns due to capital appreciation and variable dividends but also comes with increased risk, especially during economic downturns. Preferred stock offers more stability with fixed dividends and priority in asset claims during liquidation but generally lacks voting rights. An investor’s choice between these two depends on their risk tolerance and investment goals; those seeking growth might favor common stocks, while those preferring steady income might lean toward preferred stocks.

Related terms

dividend: A payment made by a corporation to its shareholders, usually derived from profits, representing a portion of earnings distributed to investors.

preferred stock:

A class of stock that has a higher claim on assets and earnings than common stock, usually offering fixed dividends but typically without voting rights.

market capitalization:

The total market value of a company's outstanding shares of common stock, calculated by multiplying the share price by the total number of outstanding shares.