Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Common Stock

What it is:

Common stock represents ownership interests in corporations.

How it works (Example):

The most prominent characteristics of common stock are that they entitle the shareholder to vote on corporate matters (typically, the shareholder gets one vote for every share he or she owns, though that is not always the case) such as whether the company should acquire another company, who the board members should be and other big decisions. Common stock also often comes with preemptive rights, which means the shareholder has a "right of first refusal," or first dibs on buying any new stock the company tries to issue.

Perhaps the most important attribute of common stock is that their holders are the last in line when it comes to getting their money back. If the company goes bankrupt and has to sell off its assets, the cash from the asset sale first goes to lenders, employees and lawyers. The shareholders get whatever is left (which is usually nothing, or just a few pennies for every dollar they originally invested).

Why it Matters:

If you own one, 100 or 100 million shares of stock in a company, you're an owner of the company. There are different kinds of stocks, and their classifications largely depend on the rights they confer on the holder. Investors evaluate these categories based on their investment objectives, and they look for stocks that meet those objectives. The two most popular categories of stock are common stock and preferred stock.

Although preferred stock owners don't usually get any voting rights, they usually receive a steady dividend and their claim to the company's assets "outrank" the common stockholders' claims (i.e., in the event of bankruptcy, the company must pay off lenders, preferred shareholders, employees and lawyers before the common shareholders get anything).

 

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