Debt Dictionary

Common Stock

Investment Dictionary -> Common Stock

Common stock refers to equity ownership in the form of securities that entitles to voting rights. In addition, it gives the right to receive a portion of the dividends and capital appreciation. The voting right entitles shareholders with a voice in the election of the management body and in the articulation of the company’s policies and objectives. In the usual case, shareholders receive one vote per each share while electing the board of directors. Voting shares pose more risks than preferred shares and other investment instruments. In case of bankruptcy, the holders of voting shares will receive their money after the creditors and the preferred share holders, among others. However, it can be said that voting shares usually outperform bonds and other financial instruments.

Sometimes, the shareholders have preemptive rights which allow them to keep proportional ownership in case that the company decides to issue additional shares. The shareholders have the right purchase stock, rather than the obligation to invest further. They can purchase such amount of shares that sustains their ownership at the present levels. This is also referred to as junior equity. The term “junior” indicates that this stock is subordinate to another financial instrument: the preferred stock. The latter is a form of capital stock that pays dividends before other surplus payments are distributed. This usually means that preferred stock provides dividend before the common stock. The company is not required to pay this dividend in case of poor financial circumstances. Moreover, the dividend on preferred stock does not fluctuate. This type of stock pays at a fixed rate.

Furthermore, the shareholders have the right to receive dividends or portion of the company’s profit. Typically, corporations reinvest a portion of their surplus and distribute the rest of the profit in the form of dividend. Another benefit from the ownership of common stock is capital appreciation. In brief, appreciation refers to the increase in asset value over a period of time.

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