Common stock

Common stock represents a proportion of ownership in a company. Bankrate explains.

What is common stock?

Common stock is a type of stock issued to the majority of shareholders in a company. Holders of common stock enjoy certain rights that their counterparts in preferred stock holders do not. Rather than receiving regular payouts, common stock holders derive value from their shares when the company grows.

Deeper definition

Common stock is what most people picture when they think “stock,” in that it makes up the vast majority of a company’s shares. For a privately held company, all those shares are owned by company personnel. If it goes public, however, anyone can purchase common shares and own some small proportion of the company.

Common stock confers shareholders with voting rights. One share is roughly equivalent to one vote, meaning that people with more shares have a much larger say in the company’s business operations, such as electing a person to its board of directors. For that reason, owners of a company usually hold common stock, while major investors hold preferred stock, which doesn’t come with voting rights.

Common stock frequently generates dividends, but, unlike preferred stock, they are not guaranteed. Instead, the value of common stock comes from the health of the issuing company: if the company makes a profit, their stock is worth more, and it can reinvest that revenue and create growth. However, that makes common stock riskier than preferred stock, because if a company’s profits fall, the investor loses money. Still, although she’s not guaranteed a return on her investment the way preferred stock holders are, an investor in common stock stands to benefit much more in times of growth.

On the other hand, in times of financial distress, common stock holders have the most to lose. If the company needs to liquidate its assets, common stock holders are the last to get paid. First are its regular creditors and bondholders, followed by preferred stock holders.

Ready to invest? You’ll want enough money in your checking account first.

Common stock example

FriendSpace is a social media app whose parent company, FriendSpace Inc., has enough funding to go public. The company is made up of 10,000 shares, of which 9,000 are common and 1,000 preferred. Its board releases 3,000 common shares in an initial public offering (IPO), which a handful of major investors snap up. Their shares increase in value on the second day of trading, and some of the investors sell them off for a profit, while others hold onto their shares and plan to exercise voting power in an effort to improve the company and generate growth.

More From Bankrate

  • Current Student Loan Interest Rates

    __BYLINE__ __INSERT-DATE__ Student loans can be a useful way to fill financial gaps in paying for higher education expenses. However, borrowing money for school comes at a cost, particularly in the form [...]

    8 MIN READ Nov. 13, 2020
    Placeholder image
  • Shop Through Chase Guide

    If you’re a savvy rewards card member on the hunt for points, chances are you’ve learned to maximize your reward categories in order to wring every point you can from your purchases. But unfortunately, [...]

    6 MIN READ Oct. 21, 2020
    Placeholder image
  • 7/1 ARM rates

    Today’s 7/1 ARM Rates The table below brings together a comprehensive national survey of mortgage lenders to help you know what are the most competitive 30-year mortgage rates. This interest rate table [...]

    1 MIN READ Sep. 22, 2020
    Placeholder image
  • The Best New Hampshire Home Insurance Companies 2021

    Few states can match New Hampshire’s natural beauty and charming New England architecture. Whether you live in a traditional Victorian home or a modern dwelling, you need adequate home insurance coverage. [...]

    5 MIN READ Feb. 12, 2020
    Placeholder image
  • Are credit card rewards taxable?

    The IRS generally doesn’t consider credit card rewards to be taxable income, but there are some exceptions.

    3 MIN READ Jan. 23, 2020
    Placeholder image
  • TEMP Popular Cards for Foreign Travel from our Partners

    Advertiser Disclosure: The credit card offers that appear on the website are from companies from which this site receives compensation. This compensation may impact how and where products appear on this [...]

    8 MIN READ Nov. 8, 2018
    Placeholder image
  • Best Credit Cards for Limited or No Credit

    Advertiser Disclosure: The credit card offers that appear on the website are from companies from which this site receives compensation. This compensation may impact how and where products appear on this [...]

    9 MIN READ May. 18, 2018
    Placeholder image