Common stock is a representation of partial ownership in a company and is the type of stock most people buy. Common stock comes with voting rights, as well as the possibility of dividends and capital appreciation. You can find information about a company's common stock in its balance sheet.
What is it?
What is a common stock, and why do people invest in it?
Simply put, each share of common stock represents a share of ownership in a company. If a company does well or the value of its assets increases, common stock can go up in value. On the other hand, if a company is doing poorly, common stock can decrease in value. Shares of common stock allow investors to share in a company's success over time, which is why they can make great long-term investments.
In general, common stock comes with the right to vote for corporate directors, as well as the right to vote on policy changes and stock splits.
There are a few exceptions to this rule, however, such as companies that have two classes of common stock -- one voting and one non-voting. Alphabet (Google) is one example of this. The company's class A shareholders (GOOGL 0.75%) have voting rights, while its class C shareholders (GOOG 0.85%) do not.
Some companies choose to distribute some of the profits on their balance sheet to common stockholders in the form of dividends, and each common stockholder is entitled to a proportional share. But this isn't a requirement.
The other main type of stock is called preferred stock and works a bit differently. The main difference is that preferred stock has a fixed, guaranteed dividend, while common stock dividends can change over time or even be discontinued. For this reason, share prices of preferred stocks generally don't fluctuate as much as common stock.
Pros and cons
Advantages and disadvantages of common stocks
Common shareholders have the most potential for long-term gains, which is the No. 1 advantage of owning common stock in a business. Some common stocks pay dividends, and unlike most other types of income investments, common stock dividends can grow over time.
On the other hand, common stockholders are also last in line when things go bad. In the event of bankruptcy, holders of common stock have the lowest priority claim on a company's assets and are behind secured creditors such as banks, unsecured creditors such as bondholders, and preferred stockholders.
As a result, when companies liquidate or go through a bankruptcy restructuring, common stockholders generally receive nothing, and their shares become worthless.
Common stock on a balance sheet
Common stock on a balance sheet
Equity is the value of what the stockholders own. On a company's balance sheet, common stock is recorded in the "stockholders' equity" section. This is where investors can determine the book value, or net worth, of their shares, which is equal to the company's assets minus its liabilities.
The main point to remember is that the total stockholders' equity is the book value of the stock, but that doesn't necessarily mean the stock trades for this amount. Rapidly growing companies may trade for several times their book value, while riskier or struggling companies may trade at a discount.
Related investing topics
Most stocks you can buy are common stocks
When buying a stock, investors don't have to wonder exactly what type of stock it is. Common stock is the default. Preferred stock will indicate in the name that the shares are preferred. Common stock is called common for a reason.
FAQ
Common stock FAQ
Is preferred or common stock a better investment?
The best choice between preferred and common stock depends on your investment goals. Preferred stocks are a form of fixed income investment and, therefore, are most appropriate for investors whose priorities are income and capital preservation. On the other hand, common stocks can share in the success of the underlying business and can be the better choice for investors looking to grow their money over long periods of time.
How do taxes affect my investments in common stocks?
If you own common stocks in a standard (taxable) brokerage account, there are two potential tax implications. If you sell the stock for a profit, you might have to pay capital gains tax on it. And if your stocks pay dividends, they are generally taxable, although most dividends get lower tax rates than ordinary income.
Can I lose all my money investing in common stocks?
It's unlikely to lose all of your money with a diversified portfolio of common stocks, especially if you focus on established and profitable businesses. However, with any given stock, it's always a possibility that something can go seriously wrong and shareholders could be wiped out.
Can you make money on common stock?
Returns can vary over short periods of time, and from stock to stock. But over the long term, stocks as an asset class tend to deliver strong returns. Historically, the S&P 500 has averaged a 9% to 10% total return over multidecade periods.
