Common Stock

By
rjonesx
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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

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

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