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What is Common Stock?

Common stock is one form of security issued by a public corporation.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 November 2014
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Common stock is one form of security issued by a public corporation. Essentially, its purchase provides the shareholder with a specified amount of equity ownership in the issuing company, as well as various rights and privileges connected with the operation of the corporation. Common stock is the most widely issued type of public stock, and is the type of choice for most initial offerings to the general public.

The ownership of common stock usually comes with several privileges. Shareholders are granted the privilege to vote in at least some decisions relevant to the operation of the corporation, such as the selection of people to serve on a board of directors. Depending on the exact regulations regarding the issuance of stock within the company’s by-laws, owing this stock may also allow investors to participate in other voting activities as well.

In return for the purchase of stock, investors also earn a dividend on their shares, based on the performance of the company. Dividends are paid at regular intervals. Most companies also supply supporting documents to shareholders regarding the performance of the stock and how the dividends are calculated.

Other types of stock may be issued by some companies. Preferred stock usually carries additional privileges and a different schedule or formula for paying dividends. Not all companies choose to issue preferred stock, however, and in fact, the bylaws of some businesses do not allow for the issuance of any form of security other than common stock.

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In the event that a corporation fails and the assets are liquidated, the value of outstanding shares of common stock may be affected. Before investors realize any partial return on the failed investment, all outstanding bonds issued by the company must be settled. In addition, preferred stockholders will take precedence over common ones. Essentially, the obligations of the company must be addressed according the court of jurisdiction’s ruling on the company liquidation before investors holding common shares of stock will receive any type of compensation.

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PelesTears
Post 4

@Parmnparsley - Stocks and bonds are both investments, but they are very different. Stocks are shares of ownership in the equity of a company. Bonds are loans to companies or governments, essentially the same as ownership of a country or company’s debt.

Bond’s have a set return, or coupon rate, that is paid when the bond matures. Bonds are usually safer than stocks, mainly because they are paid before stocks if the company fails. Organizations can default on bonds though, making some bonds safer than other bonds. Most investors consider U.S. treasury bonds safe investments, but this low risk also means lower returns.

The article and Babalaas distinguished the difference between a few types of stocks. Stocks are usually higher risk than bonds, but this also means the reward is better.

parmnparsley
Post 3

Is a bond the same as a common stock? I often hear them used in the same sentence together, so I was just wondering if they were similar investments. Can anyone give me insight into the differences and similarities between bonds and common stocks?

Babalaas
Post 2

@ Anon42051- Common stock is what you would buy from a broker. Common stock does not always pay out a dividend. Companies make a decision on whether to pay out some of their earnings as dividends, or retain those earnings so they can re-invest in growth opportunities. The Chief Financial Officer usually makes this decision based on the industry the company is in, and what stage the company is in its growth cycle.

Companies in highly competitive industries like technology, and companies in their fast growth stage, often retain earnings to re-invest (True Religion Jeans, Apple, and Google). Mature companies and companies in slow growth industries like utilities often pay out dividends (I.E. 3M, BP, and Duke Energy)

Companies only dole out preferred stock in certain instances, and preferred stockholders must give up some benefits in exchange for priority of payments. Investors often give up voting rights and less potential for stock appreciation.

anon42051
Post 1

I want to know clearly about the common stock.

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