Equity is an asset class through which investors obtain partial ownership in an organization by purchasing stock, which are shares of a company. Common equity is one of two types of equity investments, with the other being preferred equity. Under the common equity category are classifications — such as class A or class B shares — that grant investors different rights. Ultimately, common equity is a frequently traded financial security that gives investors ownership in an organization, certain voting rights and a share of potential profits. The different classifications in common equity determine the influence that investors have on major company votes.
Common equity provides investors with an opportunity to share in the profits generated at a publicly traded company based on the number of shares owned. It also exposes investors to the risks associated with potential losses. This type of stock offers investors the potential to share in further cash or stock distributions through dividends, which are paid at the discretion of a company and its board of directors based on excess income. Also, owning common shares grants investors the right to vote on important events, such as a change in the composition of a board of directors or a merger deal.
The different classes of common equity shares, such as class A or class B, might determine the number of votes to which shareholders are entitled. Both shares belong to the same issuing company, but one might carry more influence than the other. Each of these common shares typically trades at its own stock price. The terms of the different classifications of common equity are documented in public regulatory filing, and there might be an option for exchange. For instance, investors might be able to exchange class A shares for a number of class B shares at a predetermined ratio, although the transfer might not apply in the other direction, depending on the issuer's preference.
Owners of common stock fall below holders of debt and other preferred equity holders for repayment if the issuing company becomes insolvent. The order of preference for any possible cash distributions begins with creditors, including holders of a company's debt, such as bonds. Preferred shareholders, which are another type of equity owners, are next in line for any possible payment for the stocks previously owned. Common equity holders are last to receive any potential payout for the shares that were owned before the company's failure.