What Is Common Stock?

What Is Common Stock?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Common stock is a form of corporate equity ownership, a type of security. It’s one way for a company to raise money for various reasons such as to fund new projects, pay off debt, or expand their business. The holders of common stock exercise control by electing a board of directors and voting on corporate policy. They benefit from a company’s success as they have the potential for yields that vary with the company’s performance. Common shareholders can earn income from dividends, although this isn’t guaranteed. Moreover, they can gain from a rise in the market price of their shares.

Related Questions

1. How is common stock different from preferred stock?

Common and preferred stocks represent ownership in a company and each comes with its set of rights for the investor. The main difference lies in the dividends and the order in which they have a claim on corporate income and assets. Preferred stockholders have a higher claim on dividends and assets if a company goes bankrupt and must liquidate.

2. Can you lose money investing in common stock?

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Yes, investing in common stock carries risks, including the loss of the entire investment. This can occur if the company goes bankrupt, the stock’s price falls to zero, or if you sell your shares at a price lower than you paid for them.

3. Are dividends guaranteed for common stock shareholders?

Dividends are not guaranteed for common stock shareholders. The company’s board of directors can decide whether to pay dividends, and this typically depends on the company’s profitability.

4. How is the price of common stock determined?

The price of common stock is determined by the market, based on supply and demand for the stock. Various factors can influence this, including the company’s financial performance, economic conditions, and investor sentiment.

5. Can common stock have voting rights?

Yes, common stockholders often have voting rights. They can vote on certain corporate policies and on the company’s board of directors. However, not all common stocks come with voting rights.