Common stock - Confluence.VC

Common stock is a security that represents ownership in a corporation.

 

Holders of common stock elect the board of directors and vote on corporate policies. This form of equity ownership typically yields higher rates of return long term. However, in liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders, and other debtholders are paid in full.

 

Common stock is reported in the stockholder’s equity section of a company’s balance sheet.

 

Takeaways:

  • Common stock is a security that entitles a person to own a company.
  • Common stockholders get whatever assets are left after creditors, bondholders, and preferred stockholders have been paid.
  • Different stocks are traded on the market. Value stocks, for example, are stocks with a lower price relative to their fundamentals. Companies that have growing earnings tend to be growth stocks.
  • Diversifying your portfolio is essential for investors. Investors should invest in different securities depending on their risk appetite.

 

 

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Understanding common stock

Common stock is a claim on a company’s future and ongoing profits. Shareholders are considered to be part-owners of a company. However, this does not mean that shareholders have the right to walk into a company’s offices with a claim to own all or a part of its desks, chairs, or computers. These items are owned by the corporation, which is a legal entity.

 

The shareholders instead own this residual claim. Common stock can be traded on exchanges. Investors or traders may buy and sell it. Familiar stock owners may be eligible for dividends.

 

In 1602, the Dutch East India Company established the first ever common stock, and it was introduced to the Amsterdam Stock Exchange. Stock markets were established all over the globe in the 400+ years that followed. Tens of thousands of companies have been listed on stock exchanges around the globe, including the Tokyo Stock Exchange and London Stock Exchange.

 

Stocks with larger U.S. bases are traded on public exchanges such as the New York Stock Exchange (NYSE) or NASDAQ. The NYSE has 7,417 listings, with a market cap of around $53 trillion. These stocks are known to be traded on the counter.

 

Considerations

Corporate Bankruptcy

The common stock can be redeemed even if the company goes bankrupt. However, common stockholders don’t get their money until the bondholders, creditors, and preferred shareholders have received each share. Common stock is riskier than preferred shares or debt.

 

Ordinary shares have the advantage of outperforming preferred shares and bonds over time. Many companies offer all three types of securities. Wells Fargo & Company, for example, has many bonds on the secondary market. It also offers preferred stock such as Series L (NYSE: WFC-L) and common stock.

 

IPOs

A company can issue public stock only if it has an initial public offer (IPO).

 

A company looking for additional capital can expand its business by issuing stock through an IPO. An underwriting investment bank firm is required to help a company begin the IPO process. This helps determine the price and type of the stock. The public can purchase the stock on the secondary markets after the IPO phase.

 

Common stock and investors

Investors should consider stocks as an essential part of their portfolio.

 

Stocks are riskier than bonds, preferred stocks, CDs, and preferred stocks. The greater risk means greater reward. Stocks tend to outperform other investments over the long term, but they are more vulnerable to volatility in the short term.

 

There are many types of stocks. Companies that have growing earnings tend to be growth stocks. Value stocks are companies that have a lower price relative to their fundamentals. Value stocks pay a dividend and are not like growth stocks. Market capitalization is how stocks are classified – large, small, and mid. Large-cap stocks have a higher trading volume and indicate a more stable company. Because small-cap stocks are often newer companies looking to grow, they can be more volatile than large caps.

 

What is the difference between common stock and preferred stock?

Common stock is the most common type of shares issued by companies and what you will encounter when trading on an Exchange.

 

These shares are usually issued with voting rights and are the last in the preference order of being repaid if a company goes under. In this ordering, preferred shares are more valuable than common stock. While preferred shares do not have voting rights, they are eligible for regular and higher dividend payouts. Preferred shares can sometimes be considered a mix of common stock and bonds.

 

How can I use common stock to vote at company meetings?

Ordinary common shares have one vote each, which gives shareholders the right to vote in corporate actions.

 

These are often conducted at a company meeting. You can cast your proxy to vote for you (and others) if you cannot attend. Votes could be held on matters such as whether to merge or acquire a company or whether to vote for members of the board or approve stock splits and dividends.

 

What is common stock referred to as equity?

Common stock is a form of joint ownership representing a portion of a company’s remaining ownership.

 

A company has a balance sheet that includes assets and liabilities. Assets refer to the assets or rights that the company has, such as equipment, property, and cash reserves. Liabilities are the company’s owings. These are payables, debts, and other obligations. The company’s assets will be greater than its liabilities if it is healthy. Shareholder equity is what is left. The company’s shares represent this.

 

Bottom line

Common stock is not unified. Some companies may issue multiple classes of common stock. A company may issue both voting shares and non-voting shares. Dual classification is used to maintain control of the company.

 

Despite differences in voting rights, the majority of the profits earned by the company are shared between the different classes.

 

To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.

 

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