What is Common Stock?
A common stock is a type of security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure, meaning they have the greatest risk but also the greatest reward potential.
The Benefits of Common Stock
Common stockholders benefit from owning a piece of a company, including any dividends or earnings that the company may generate. If the company is sold or goes public, common stockholders may also see a return on their investment in the form of a capital gain. In addition, common stock typically entitles the holder to vote on corporate matters, such as the election of the board of directors.
The Risks of Common Stock
Common stockholders face the biggest risk in a company because they are last in line for ownership claims. This means that if the company goes bankrupt, common stockholders will only receive payment after bondholders, preferred shareholders, and other creditors have been paid. As a result, common stockholders may lose their entire investment.
How to Invest in Common Stock
Investors can purchase common stock through a broker-dealer, which will execute the trade on an exchange. Alternatively, investors can buy common stock directly from a company through a direct stock purchase plan.
The Different Types of Common Stock
There are two main types of common stock: voting and non-voting. Voting common stock gives shareholders the right to vote on corporate matters, such as the election of the board of directors. Non-voting common stock does not entitle the holder to vote, but typically still entitles the holder to receive dividends and capital gains.
The History of Common Stock
The first type of common stock was introduced in England in the 1600s. The Dutch East India Company was the first company to issue common stock, and it quickly became a popular way to raise capital. By the 1800s, common stock was the primary type of security traded on exchanges in the United States. Today, common stock is still the most popular type of security traded on exchanges around the world.
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