What Is Common Stock?
Common stock refers to the stock that is issued more broadly than preferred stock and that gives the stockholders voting rights and elects the board of directors of the firm. The common stockholders are typically the last to get paid in the event of the liquidation of the corporation, that is, after the creditors and the preferred stockholders.
Definition 2
Common stock is a type of bank capital measured by the par value of all common equity shares outstanding that pays a variable return to its owners after all expenses and other claims are met.
More Thorough Understanding of the Term
Common stock is a type of equity ownership in a firm. This means that when an investor purchases common stock, they are buying a piece of the company and becoming a shareholder. The proportion of ownership in the corporation is determined by the number of shares possessed.
Common stock often grants the shareholders voting rights, allowing them to participate in the company's decision-making process. The number of votes per share, however, can vary depending on the company's articles of organization. Dividends, which are payments provided by the company to its shareholders as a portion of its profits, are also available to shareholders.
Common stock, unlike bonds, does not have a fixed dividend or interest rate, and its value can fluctuate depending on market demand and the company's financial success. As a result, while common stock investors face more risk than bondholders, they also have the potential for higher gains.
Risk Involves in Common Stock
Market risk, which refers to the likelihood that the stock's value will decline owing to changes in the overall market or the company's financial performance, is one of the key hazards associated with common stock. Market risk affects all investors, but those who have a large stake in a single stock are especially exposed.
Dividend risk is another risk connected with common stock. While dividends can provide a consistent source of income, they are not guaranteed, and companies can choose to reduce or suspend dividends at any time. This is especially troubling for investors who rely on dividends for income.
Examples
Example 1
Tesla is an electric vehicle and clean energy corporation based in California. In 2010, the company became public, and its common stock is now traded on the NASDAQ. Tesla's stock has risen dramatically in recent years as a result of the growing popularity of electric vehicles and the company's creative approach to renewable energy technology.
Example 2
Coca-Cola is a multinational beverage corporation that manufactures and sells a wide range of non-alcoholic beverages. Its common stock is traded on the New York Stock Exchange. Because of the company's tremendous brand awareness and continuous financial performance, Coca-Cola stock is regarded as a safe investment.
In Sentences
- Common stock is a security that is a claim on the earnings and assets of a company.
- Common stock confers voting rights but does not grant preferential rights of dividends or claims against the assets of the firm.