Definition of Common Stock

by Investing School on March 7, 2010

Common stock is a type of corporate ownership that gives those that own the stock a portion of equity or ownership in the company. The reason it is called “common stock” is to set it apart from “preferred stock”. Preferred stock is higher ranking stock than its neighbor, common stock.

If a company were to go bankrupt, the common stock investors would receive their portion of the funds distributed after those holding preferred stock. They will also receive funds after bondholders and creditors. It is also important to note, however, that shares in common stock perform, on average, better than preferred shares or even bonds over a period of time.

Common stock also usually carries voting shares. Typically, shareholders that own common stock will receive one vote per share. This is not always the case, however. And, the number of votes a shareholder has is not always proportionate to the number of shares held. Shareholders of common stock have the ability to influence the company in which they hold shares through voting on different corporate objectives and policy plans. They even have a part in helping to elect the company’s board of directors. The board of directors is the group that represents the corporation and the owners of the corporation. The board of directors oversees and makes major decisions related to the company, so shareholders have a say in who oversees the company. Shareholders of common stock also can receive voting rights that are related to company matters such as stock splits or other company plans.

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