Definition
Common stock represents ownership shares in a public or privately held firm. Holders of common stock typically have voting rights that allow them to vote on corporate matters such as the election of the board of directors and significant company policies. Common stockholders are also entitled to receive dividends, which are distributions of the company’s profits. In the event of corporate bankruptcy, common stockholders are paid last, after bondholders and preferred stockholders.
Examples
- Apple Inc.: Everyday investors who own Apple Inc. shares are common stockholders, meaning they have voting rights in the company’s annual meeting and are eligible to receive dividends if declared by the company.
- Startup Company: A small tech startup issues common stock to its founders and early employees, giving them ownership stakes in the company. These common stocks come with voting rights and potential dividends as the company grows.
Frequently Asked Questions (FAQs)
What are common stockholder rights?
Common stockholders generally have the right to vote on corporate matters, receive dividends if distributed, and claim assets during liquidation after other debt holders are paid.
How is common stock different from preferred stock?
Common stock typically provides voting rights and dividends, but holders are last in line during asset distribution in a bankruptcy. Preferred stockholders do not usually have voting rights but may have a higher claim on assets and fixed dividends.
Can the value of common stock fluctuate?
Yes, the value of common stock can fluctuate based on market conditions, company performance, investor sentiment, and other economic factors.
How do common stockholders benefit from company profits?
Common stockholders benefit from company profits through dividends and the appreciation of stock value, reflecting increased profitability and growth.
Are common stock dividends guaranteed?
No, dividends are not guaranteed and are paid at the discretion of the company’s board of directors.
What is the risk of investing in common stock?
Investing in common stock carries risks, including the potential for loss of principal, dividend variability, and being last in the line for asset claims during bankruptcy.
How are common stocks bought and sold?
Common stocks are typically bought and sold on stock exchanges through brokers or trading platforms.
What is the impact of issuing new common stock on existing shareholders?
Issuing new common stock can dilute the ownership percentage of existing shareholders and potentially reduce their voting power.
What does ex-dividend mean for a common stock?
Ex-dividend means that if you purchase a stock on or after the ex-dividend date, you will not receive the upcoming dividend payment.
How is common stock reported in financial statements?
Common stock is reported under shareholders’ equity on the company’s balance sheet, usually at the par value or issuance price.
Related Terms
- Preferred Stock: A type of stock that typically does not offer voting rights but has a higher claim on assets and earnings than common stock, usually providing fixed dividends.
- Dividends: Payments made by a corporation to its shareholder members, typically derived from profits.
- Stock Exchange: A marketplace where stocks, bonds, and other securities are bought and sold.
- Voting Rights: Rights of shareholders to vote on corporate policies and the election of the board of directors.
- Corporate Bankruptcy: A legal proceeding involving a company that is unable to pay its debts, resulting in the restructuring or liquidation of its assets.
Online Resources
- Investopedia: Common Stock
- U.S. Securities and Exchange Commission (SEC)
- Yahoo Finance: Stock Market Data
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham: A classic text offering fundamental principles for investment, including insights into common stocks.
- “Common Stocks and Uncommon Profits” by Philip Fisher: Focuses on the qualities and investment philosophies for selecting successful common stocks.
- “Security Analysis” by Benjamin Graham and David Dodd: A comprehensive work on investment analysis, valuation of securities, and approaches to investing in common stocks.
Accounting Basics: “Common Stock” Fundamentals Quiz
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