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What is a Common Stock?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 03 November 2016
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Common stock is stock in a company which comes with voting rights and an opportunity to share in the profits of the company. This type of stock is commonly issued by companies making offerings of stock and is a popular choice for people interested in buying and selling stocks. Prices for common stock vary depending on market pressures. Stock exchanges offer opportunities for people to buy, sell, and trade common stock with each other and with brokers.

This type of stock should be contrasted with preferred stock, another type of stock which works slightly differently. Preferred stock offers several advantages over common stock. The first advantage is a fixed dividend, which generates more reliable returns than common stock, although it also means that the stockholder can miss out when large profits are made because the dividend will not be adjusted. In addition, in the event of a bankruptcy, preferred stockholders are ahead of holders of common stock, as are creditors, lienholders, and so forth.

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There are some advantages to holding common stock. Voting rights can be important because they allow people to vote on members of the board of directors, policy, and stock splits, which gives them a role in the governance of the company. In addition, the dividends paid out on common stock can be big when the company is making large profits. Finally, common stock also appreciates in value, allowing people to sell their stock at a higher price than they paid. Conversely, of course, the stock can also depreciate, leaving people holding stocks which are worth less than they paid.

Some issuings of common stock come with what are known as preemptive rights. If preemptive rights are attached to the stock, in the event that a company issues more stock, holders of common stock have an opportunity to maintain their proportional share of ownership in the company by being given first choice when it comes to buying the new stock issue.

Also known as ordinary shares, common stocks are bought and sold in very high volume on stock exchanges all over the world. The common stock value can vary in response to many different factors and it is not uncommon to see volatility in value around the time that companies pay out dividends and release new products. The art of trading stocks requires a number of different skills which will allow people to identify good buys and the right time to sell so that they can maximize their trading profits.

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TreeMan
Post 6

I think it is amazing to see how easy it is to invest in stocks nowadays. When I started off, you had to set up an account with a broker. You had to constantly keep in touch and be checking the newspaper to see how your stocks were doing and figure out what other things you might be interested in buying.

Now that we have the internet, you can sort stocks in hundreds of different ways and get whatever information you want in a matter of minutes. I think the greatest part is that you can sell your stocks with the click of a mouse.

I guess that could be seen as being good or bad depending on

how patient you are, but regardless, is is a heck of a lot easier than having to call up your broker and then him putting in the call order. In same cases, if your stock was falling fast, you might lose 4 or 5 more dollars between the time you placed the call and your stock was actually sold. Now you know exactly what price you're selling at.
matthewc23
Post 5

@JimmyT - Dividends are just a payment given to shareholders that comes from the year's profits. A lot of companies will divide a portion of their profits. Some of them will keep all of the profit and reinvest it in the company, though. It is usually not much, maybe a quarter per share. Some of the really successful companies could give out more.

As for voting, once you buy a share of a company, you will have to opportunity to vote in large scale decisions. A lot of people just choose not to vote, and that is also your choice. If you owned a lot of shares, though, it would be in your best interest.

For people here who

do a lot of investing, I am curious to know what you consider the best common stock valuation methods. I like to do a lot of my investing in technological stocks. What are the normal price to book value numbers and some of the other common stock ratios that you like to go by?
titans62
Post 4

@JimmyT - There is no reason not to be asking questions. Always remember it is your money on the line, so it literally does pay to be informed.

The big thing to consider if you are going to invest in common stocks is that you do have the potential to lose everything or at least some portion of the money. If you aren't okay with that risk at this time, it's probaby best to just put the money in a CD or else invest in things like index and mutual funds that come with a lot less risk.

Since you say you're a college student I am doubting you have several thousand dollars to invest, so I would say

an online broker is fine. The other option would be to find a physical broker, but they skim part of your profits off the top to pay themselves.

I would just suggest finding some books about investing and learning the basics of the different types of businesses and the different metrics used to measure stocks. Any of the books by Peter Lynch are good to start with. Good luck!

JimmyT
Post 3

I have never tried to invest in stocks before, how easy or difficult is it to do? I am in college now, and have some extra money I am looking to invest. I have seen advertisements for different places online. Are these the best places to do it, or are there other options.

How much do I have to have to start with, and what should I reasonably expect to make if I invest? I guess I should also ask the questions of what types of stocks I should invest in.

What is all the talk about dividends and voting, too? I know dividends are some sort of payment you get if the stock does well, but how is it figured, and how much are the payments, usually? Sorry about all the questions.

LisaLou
Post 2

@bagley79 - Most of my stock transactions have been with common stock, but I do have a couple situations where I bought preferred stock.

It isn't difficult to buy, there are just some things to keep in mind down the road. The biggest difference I noticed with preferred stock is that one of the companies ended up filing for bankruptcy and I was to be paid before a common stock holder.

I don't really know if it was that much more advantageous in the end to be a preferred stock holder because at that point, the company wasn't worth anything anymore. I also didn't have that many shares, so it wouldn't have made that much of a difference.

For the most part, I stick with common stock because of the simplicity of it. I know that a common stock dividend is not usually as much as a fixed divided on a preferred stock, but still like how easy it is to deal with common stock if you trade on a regular basis.

bagley79
Post 1

I bought bought and sold different kinds of stock, and common stock is by far the easiest to deal with.

Especially when it comes to tax time and trying to figure everything out. It is much easier to deal with common stock accounting than something like a penny stock.

There is also a lot more volume when it comes to trading common stock, so you don't have to worry about getting in or out of the trade.

One thing I have never bought is preferred stock, and wonder how easy that is to buy and sell?

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