What is Common Stock

When you hear investors speak about stocks they are generally talking about a company’s common stock. Every corporation, public or not, must issue common stock. These common stock shares represent ownership in the issuing corporation. If an investor owns 10% of the total outstanding shares then the investor would literally own 10% of the company. Common stock holder rights deferrer from company to company but in general they include:

• Right to Vote
• Receipt of Dividends
• Salvage Rights

The right to vote is what gives common stock holders there power. It allows common stock holders to determine who manages the corporation. For instance common stock holders vote on the Chief Executive Officer (CEO), and other directors whom attend to the day to day operations of the company. Common stock holders also vote on extraordinary events such as mergers, acquisitions, and stock splits. Because of the right to vote a wealthy individual or corporation can and often do take over corporations. For instance, if you purchased 51% of the common stock or gained the confidence of the majority of common stock holders, you could implement yourself or your confidant into positions of power in the target corporation.

Common stock holders also have the right to receive dividends if they are declared by the company’s board of directors. However, not all companies pay dividends as they prefer to repurchase shares. In recent times the repurchasing of common shares has become more popular than paying dividends. By repurchasing shares a company will increase earnings per share as they have less outstanding stock. If a company does declare dividends it must pay preferred share holders prior to any common stock holders.

As listed above common stock holders also have salvage rights. Salvage rights means that common stock holders will get a portion of the left over assets if a company is dissolved. However, many other parties must be paid before common stock holders receive any of the dissolved company’s assets. All salaries and taxes must be paid followed by creditors, bond holders, preferred shareholders, and finally common share holders. As common stock holders are the last individuals to receive a part of the dissolved companies assets they generally receive nothing. Although the salvage rights might seam brutal for common stock holders they are fair.

Common stock holders are the direct owners of a corporation. As a corporation expands and generates more profits the shareholders will directly benefit by an increase in share price. Historically common stock has provided excellent returns when compared to other investment opportunities. If you believe history continually repeats then this trend should continue well into the future.