Common Stock Meaning
Common stock (or ordinary share, voting share or common share) is tradeable equity issued by a business and represents partial ownership of the underlying company. Ownership comes with specific rights such as voting in board member elections.
Most investors are however less interested in the voting rights and more drawn to the value the company represents as well as the expected capital gains over time. Common stockholders usually benefit the greatest when a business is successful and the least when the company fails.
Businesses issue common stock to raise interest-free funding for use in operations such hiring, expansion, product development and research. This can lower its dependence on debt. Common stock has six main features:
- Availability — The primary way that investors acquire partial ownership of a business.
- Ownership — Represents partial ownership.
- Voting rights — Have the right to vote in board member elections.
- Fungibility — All common stock are worth the same value at any point in time.
- Volatility — More volatile than preferred stock and corporate bands. Value is bound to change significantly over time.
- Dividends — Entitled to dividends (after preferred stockholders) if a company decides to distribute company profits.
In theory, the price of common stock should be based on the value of the underlying business. In reality, the price is driven by market forces. Good news can cause it to rise while bad news may cause it to fall to record lows.
Even though the company itself may be doing well, macroeconomic events could depress the stock price. This is the primary risk of common stock — in the worst case, it could lose its entire value. Common stockholders are also the last to be paid if the business goes bankrupt and the assets liquidated.