What is common stock?

Common stock is the most common type of equity that companies issue, and the one most individual investors hold. You’ll find it on corporate balance sheets, in public markets, and in nearly every investment portfolio.

Understanding common stock

When you own common stock, you own a slice of a company. Most companies issue common stock to raise capital without incurring debt. In return, shareholders get equity. If the company performs well, the value of your shares may rise. You may also receive dividend payments and cash distributions from company profits. However, these are not always guaranteed.

Common stockholders are typically the last to receive payment if a company goes bankrupt. Bondholders and preferred shareholders get paid first because they have fixed claims on the company’s assets. As a common shareholder, you only get what’s left.

But, because you are taking on more risk, you also have more to gain. If the company performs well, there’s no cap on how much your shares can grow in value. That’s why the common stock has greater return potential over time.

Here are the key components of common stock you should know about:

• Voting power: When you own common stock, you get a say in how the company is run. You can vote on board members, mergers, and other major decisions. One share usually equals one vote.
• Dividends (if declared): Some companies share profits with common stockholders through stock dividends. If the company does well and chooses to distribute earnings, you will receive payments, typically in cash. But there is no guarantee.
• Growth potential: If the company grows and its stock price increases, your shares become more valuable. This is one of the main ways you build wealth through common stock.
• Easy to buy and sell: You can trade common stock on public markets like the NYSE or NASDAQ. This provides you with flexibility if you wish to exit your investment.
• Par value: Each share has a nominal “par value” set during issuance. It doesn't affect your returns, but it does show up on financial statements.

Common stock vs. capital stock vs. preferred stock

The key difference between these lies in what they represent. Capital stock defines the structure. Common and preferred stock, on the other hand, define ownership. The capital stock is the total number of shares a company is authorized to issue. It’s a legal and accounting concept. Common and preferred stock are the actual types of stocks companies issue to investors.

How companies issue common stock

Issuing common stock is a routine method for businesses to raise capital. It’s common among both startups and large corporations, especially during periods of high growth or when entering public markets. In 2023, the number of IPOs listed on U.S. exchanges grew by 22%, signaling renewed investor interest and a rebound in equity financing.

The process can take several months from start to finish, depending on the company's size, the method of issuance, and regulatory requirements. Going public through an initial public offering (IPO) typically takes 4 to 6 months, while private placements may occur more quickly.

• Step 1: Set the number of authorized shares. The company begins by determining the maximum number of shares it can legally issue. This number is added to its corporate charter and approved by the board. These are called authorized shares. Not all of them are issued right away. Some are kept in reserve for future funding rounds or employee stock plans.
• Step 2: Choose how to offer the shares. Next, the company decides whether to go public or stay private. Public offerings include traditional IPOs and direct listings, while private placements involve selling shares directly to selected investors. The choice depends on how much capital the company wants to raise and how much control it wants to retain.
• Step 3: Register with the SEC. If the company plans to go public, it must file a registration statement with the Securities and Exchange Commission. This includes detailed financial statements, risk disclosures, and an explanation of how the funds will be used. The review process ensures transparency and protects potential investors.
• Step 4: Determine the offering price and number of shares to issue. The company collaborates with financial advisors or underwriters to determine the number of shares to release and the price at which to offer them. Underpricing in IPOs can cost companies an average of 13% in potential capital raised. This step affects how much capital the company will raise and how much ownership current shareholders will retain.
• Step 5: Offer shares to investors. Once approved, the company begins offering shares. In an initial public offering (IPO), most shares are typically allocated to institutional investors first. In a direct listing, the stocks trading publicly without a formal offering phase. In a private placement, shares are sold to a select group of investors, such as venture capital firms.
• Step 6: Start trading on a public exchange. If the offering is public, the company’s shares begin trading on an exchange like the NYSE or NASDAQ. At this point, individual investors can buy and sell the stock through a brokerage account, and the company becomes subject to ongoing market scrutiny.
• Step 7: Comply with ongoing reporting requirements. Once public, the company must regularly file financial reports, disclose major events, and follow strict regulatory rules. This includes quarterly (10-Q) and annual (10-K) reports, plus real-time disclosures for significant developments. These filings help keep investors informed and maintain the company’s public status.

How common stock shows up on the balance sheet

When a company issues common stock, it records the transaction in the shareholders’ equity section of the balance sheet. This section illustrates the amount of capital the company has raised from its owners and the proportion that came from issuing stock.

You will usually see common stock reported in two places:

1. Common stock (at par value): This line reflects the total par value of all issued common shares. It’s calculated by multiplying the number of shares issued by the par value per share. For example, if a company issues 1 million shares at a par value of $0.01, this line would show $10,000. The number is symbolic and doesn't reflect market value.
2. Additional Paid-in Capital (APIC): This line indicates the amount of money shareholders have paid above the par value. If shares are sold for $10 with a $0.01 par value, the remaining $9.99 goes into APIC. This is usually the largest portion of equity raised through stock issuance.

Together, these two lines show how much money the company raised by selling common stock.

So, for example, if a company issued 1 million shares at $10 each, with a par value of $0.01, the balance sheet will reflect:

Common stock = $10,000

APIC = $9,990,000

Total capital raised = $10,000,000

You will not see "outstanding shares" or "market value" directly on the balance sheet. But this section helps you understand how the company is funded and whether it relies more on equity or debt.

In 2025, total equity capital raised through U.S. IPOs is expected to reach $37.60 billion. That capital is recorded across the common stock and additional paid-in capital lines on the balance sheet.

How common stock builds wealth

The value of common stock is measured by the market and, ultimately, by investors. Every time a stock is traded, its price reflects how much the market believes the company is worth. Over time, that price growth, combined with dividends and reinvestment, creates wealth for shareholders.

What common stock tells you about a company’s strength

Common stock gives you insight. When a company consistently attracts investors, maintains a stable stock price, or raises capital through equity without overextending itself, that’s a sign of financial strength.

Strong companies often reinvest their earnings, return value to shareholders through dividends, and maintain healthy shareholder equity. For investors, common stock is a direct way to track a company's growth, risk management, and creation of long-term value. It indicates whether a business can establish trust in the market and maintain it.

Managing common stock well means more than just issuing shares. It's about tracking them clearly and reporting them accurately. Ramp helps businesses do both, reducing manual work while keeping financial data investor-ready.

FAQ

Is common stock an asset, a liability, or equity?

Common stock is classified as equity on a company’s balance sheet. It represents ownership in the business. For the company, issuing common stock increases shareholders’ equity. For investors, owning common stock is considered a financial asset, not a liability.

How are dividends from common stock taxed?

Dividends are typically taxed as either qualified or ordinary income, depending on how long you have held the stock and where it’s based. Qualified dividends are taxed at lower long-term capital gains rates (0%, 15%, or 20%). Ordinary dividends, on the other hand, are taxed as regular income.

What happens to common shares during a stock split or reverse split?

In a stock split, your number of common shares increases while the share price decreases proportionally. In a reverse split, your common share count decreases, while the price per share rises. Either way, the total value of your investment stays the same. These changes are cosmetic and don’t affect ownership percentage or company fundamentals.

How does share dilution affect the value of common stock?

When a company issues more shares, existing ownership is diluted. This means each share represents a smaller piece of the company. Dilution can lower Earnings Per Share (EPS) and reduce the value of your holdings if the new shares don't create enough added value.