What is Common Stock?

Common stock refers to a security that represents ownership in a company. All too often, holders of common stock have the ability to exercise control through electing an experienced board of directors as well as voting on corporate policy. Holders of common stock are usually on the bottom of the ladder of priority when it comes to ownership structure. In the case of liquidation, common stakeholders have the right to a corporations assets. The preferred stakeholders will then be fully paid.

How Does Common Stock Work?

With common stock, if a corporation is declared bankrupt, the shareholders won't receive their money until when the creditors, as well as preferred shareholders, have garnered their shares respectively. This implies that common stocks are pretty riskier compared to somewhat preferred shares. The upside to these common shares is that they often outperform bonds as well as preferred shares. As such, many companies will issue the three available types of securities. Common shares refer to those shares in a corporation that doesn't provide guaranteed dividends to its investors. The sum of dividend distributions is at the discretion of the management of the company. While investors of common stock may either earn or not earn money based on dividends, they still expect to a rise in the share price as the company expands its operations to increase profits. Stocks will offer higher returns compared to bonds and other investments.

Difference between Common and Preferred Stocks

There are two main types of stocks in the stock industry- common stock and preferred stock. Although they are both referred to as stock, the two operate differently from each other. They also have different potentials for garnering profits. Every stock has a different risk profile that may only be suitable for certain types of investors. Here are the main differences:

• Common shares have major political rights. On the other hand, preferred shares dont have the right to vote particularly in meetings.
• Preferred shares have an additional right that offers preference to receive the dividends generated by a company while common shares dont have these extra rights.
• Preferred shares have a slightly lower level of liquidity compared to common shares.
• A company can instantly redeem the preferred shares at any given time. This implies that they can buy the shares at the same price.
• Common shares often have a limited liability while preferred shares have greater responsibility.

Advantages of Common Stocks

• The administration of capital through various stock shares doesn't compel restrictions on the company. Therefore, the corporation will be allowed to have greater flexibility mainly when it comes to having long-term financing without any problems.
• Its pretty advantageous for a company to gain finance through common shares. This implies that the issuance of common capital, unlike preferential capital, doesn't impose major restrictions on debt issuances. This allows a company to uphold flexibility in order to acquire long-term financing.

Disadvantages of Common Stocks

• Usually, the total cost of financing is higher than the existing alternatives. One must be careful when it comes to the issuance since the process may entail significant loss which may have a substantial negative impact on the company.
• The issuance of more common shares imposes high risks on the loss of the control of the company by the existing owners.

Creditors, as well as the preferred stakeholders, have priority rights over the common shareholders. However, the latter have always assumed the greatest risk in the company. They are also the ones who own a higher needed return on the money they have invested in. The conventional shareholder on the other hand can't lose more than the financial contribution to society. Besides, the assets they own aren't at risk if the said company is experiencing financial difficulties.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition