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Common Stock

Definition

Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently in other parts of the world; "common stock" being primarily used in the United States. They are known as Equity shares or Ordinary shares in the UK and other Commonwealth realms. This type of share gives the stockholder the right to share in the profits of the company, and to vote on matters of corporate policy and the composition of the members of the board of directors.

Common stock represents the shares of an organization that come with the power of voting in the organization about its policy, and allows common shareholders to elect a board of directors. Common stock holders often receive more long term benefits than other types of stock holders, but they often lose everything in case a company goes bankrupt and its assets have to be liquidated. These stocks are often issued by organizations to raise the capital required to start its operations or expand in the near future.

The Ordinary Stock

Common stock is often termed as ordinary stock around the world because it is at the bottom of the ownership chain. These stock holders are different from the preferred stock holders, because they have the privileged rights of having special returns such as on the quarterly basis.

Common shares do have an advantage. They usually grow well with the success of an organization, and they give a good percentage profit after the passage of a fiscal year. The dividends can be relied upon, and the returns are excellent for a successful company. Common shares are the ones that are normally traded on a public stock exchange.

These shares are often termed as equity shares in the European stock markets. They allow owners to have a proportional share in the company profits, and cast their vote at the general meeting of the company to which they are given a proper invitation.

Liquidation Hazard

When a company goes bankrupt though, common shareholders suffer the greatest. The company assets are sold to first fulfill the immediate cash needs such as paying salaries as well as outstanding loans of the company. The available sum is then used to pay off company bondholders, and if some funds are left, then preferred shareholders are given their promised sums. The common shareholders are given last preference in this payment chain, and the remaining sum is divided among them at the end, but often nothing is left after taking care of the outstanding loans.


Further Reading


Common stock returns and presidential elections
www.tandfonline.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

Convertible debt issuance, capital structure change and financing-related information: Some new evidenceConvertible debt issuance, capital structure change and financing-related information: Some new evidence
www.sciencedirect.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

Another look at long memory in common stock returnsAnother look at long memory in common stock returns
www.sciencedirect.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

A simplified jump process for common stock returnsA simplified jump process for common stock returns
www.jstor.org [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

Economic evaluation of voting power of common stockEconomic evaluation of voting power of common stock
onlinelibrary.wiley.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

Common stock offerings across the business cycle: Theory and evidenceCommon stock offerings across the business cycle: Theory and evidence
www.sciencedirect.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

Boys will be boys: Gender, overconfidence, and common stock investmentBoys will be boys: Gender, overconfidence, and common stock investment
academic.oup.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

The effect of financial statement classification of hybrid financial instruments on financial analysts' stock price judgmentsThe effect of financial statement classification of hybrid financial instruments on financial analysts' stock price judgments
www.jstor.org [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

Interest rate changes and common stock returns of financial institutions: evidence from the UKInterest rate changes and common stock returns of financial institutions: evidence from the UK
www.tandfonline.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …

Interest-rate risk and the pricing of depository financial intermediary common stock: Empirical evidenceInterest-rate risk and the pricing of depository financial intermediary common stock: Empirical evidence
www.sciencedirect.com [PDF]
… eg, R. Banz, "The Relationship Be- tween Return and Market Value of Common Stocks," Journal … in January: Empirical Tests for Year End Tax Effects," Journal of Financial Economics, June 1983 … Hirsch (Stock Trader's Almanac, op cit.) puts it simply: "Each president of the United …



Q&A About Common Stock


What is common stock?

Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Commonwealth realms. This type of share gives the stockholder the right to share in the profits of the company, and to vote on matters of corporate policy and the composition of the members of the board of directors.

What do investors usually receive when a corporation goes through bankruptcy?

Investors typically receive nothing when a corporation goes through bankruptcy since all assets become property owned by creditors (including employees) or bondholders who will be paid before any funds can go towards paying off investors' debts.

How do common shares differ from preferred shares?

Common shares are different from preferred shares because they have special returns such as on quarterly basis.

Are there any disadvantages associated with having common shares?

Yes, when a company goes bankrupt though, shareholders suffer greatest loss; assets sold first to meet immediate cash needs such as paying salaries as well outstanding loans; if some funds left then preferred shareholders given promised sums; common shareholder loses everything if company goes bankrupt.

Who has priority over other types of shareholders in case a company goes bankrupt?

In case a company goes bankrupt though, shareholders suffer greatest loss; assets sold first to meet immediate cash needs such as paying salaries as well outstanding loans; if some funds left then preferred shareholders given promised sums; common shareholder loses everything if company goes bankrupt.

What is the advantage of having common shares?

The advantage is that these share grow well with success of an organization, and give good percentage profit after passage of fiscal year. Dividends can be relied upon, and returns are excellent for successful company.

How does common stock differ from preferred stock?

Preferred shareholders have priority over common shareholders in receiving dividends if they are declared by management. In case there is liquidation, preferred shareholders receive their investment back first before any money goes to common shareholders. When bankruptcy occurs, preferred shareholders typically get nothing while common shareholders may lose everything they invested into that company's stocks.

What is the difference between common stock and preferred stock?

Common stock represents shares of an organization that come with the power of voting in the organization about its policy, and allows common shareholders to elect a board of directors. Preferred stock holders often receive more long term benefits than other types of stocks, but they often lose everything in case a company goes bankrupt and its assets have to be liquidated. These stocks are often issued by organizations to raise capital required for starting operations or expanding in near future.

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