Common stock is a share in a corporation traded on a stock exchange and owned by the public.
Corporations issue common stock to raise money to fund operations, growth or other purposes, such as buying other companies. The holders of common stock benefit if the price of the stock rises over time.
Stock owners also can receive dividend payments based on the number of shares they hold. Most of the time, when someone says they “own that company,” what they mean is that they own common stock in it.
Investors buy common stock in shares, either through an initial public offering (IPO) or the secondary market, which is the stock exchange.
Investors buy common stock through a broker, though a direct stock purchase plan or they own shares by investing in a stock mutual fund.
Common stock might be better explained by understanding what it is not: A bond or preferred shares.
A bond is a loan to a company or government entity that pays periodic interest. Bond investors do not expect to lose money but generally accept a lower return than stock investors on average.
Preferred shares are a hybrid from of stock with some features of a bond and some features of normal stock. Owners of preferred shares, however, typically do not have voting rights in regard to management.
In the event of bankruptcy, bond holders and preferred shareholders are given priority. A court would give these investors money first if a company liquidates its assets.
Preferred shareholders can collect delayed dividends, sometimes in arrears, once the payments resume. Common stock owners do not get this benefit.
Nevertheless, the long-term performance of common stock is generally better than the total return expected from bonds and even preferred shares.
Common stock investment thus make up the large majority of stock investments in most investment markets.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.