Takeaways
- Common stock is equity ownership in a company with voting and dividend rights.
- Investments in common stocks of publicly traded companies are highly liquid.
- Investors can buy common shares on stock exchanges like the Nasdaq or NYSE.
- Retail investors can buy common stock through online stock brokerage account.
- Common stock is one of the most popular investments in retirement and personal portfolios.
What Is Common Stock?
Common stock represents partial ownership in a corporation. If you own common stock, you own a share of the company, and all shareholders have proportionate ownership of the company’s assets and profits.[1]
Each share of that common stock also gives that shareholder one vote per share in major corporate decisions, such as electing someone to the board of directors, determining executive pay packages, and voting on other company matters. The voting power endowed to common stockholders gives them influence over corporate policies and subsequent actions.
Additionally, if you own common stock, you are entitled to dividends. Dividends are a portion of the company's profits distributed to shareholders according to the number of shares they own. It is important to note that dividends are not guaranteed, and whether a company pays depends on its industry, life cycle, and performance. The board of directors can approve shareholder dividend payments quarterly, annually, or ad hoc.
Take the Next Step:
Acorns Website
Acorns Investing App
Smart Money Rating: 5/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
Annual Fee: N/A
Publicly traded companies list their common stock on stock exchanges, like the NYSE or the Nasdaq, making it available to retail investors and institutional investors for purchase. Investors purchase common stock with the expectation that the stock will grow in value over time and earn capital gains. These potential gains are the most significant reasons common stocks are so attractive to individuals, portfolio managers, and retirement funds focused on long-term growth.
There is always investment risk when investing, and investing in common stock is no different. As a common stockholder, you are virtually last in line to have a claim on a business’s assets if it goes bankrupt. As a result, common shareholders are at the back when recouping any investment if a company goes bankrupt.
Whether you are new to investing or a seasoned investor, it is essential to research any company you are investing in before buying stock.
How Common Stock Works
When a company starts, companies issue common stock to founders, employees, and the board of directors. From there, companies issue common stock to investors to raise money for the business in exchange for ownership.
Many startup companies need this capital, whether from accredited investors in seed-stage rounds or venture capital in later-stage private company financing, to get off the ground. Many companies will try to access the public equity markets when a business proves its business model and needs to grow even more.
If a company is ready to be publicly traded, it can issue common stock through an initial public offering (IPO). Common stock is then traded freely on stock exchanges like the NYSE or the Nasdaq, and investors can purchase it through their online brokerage accounts.
Owning common stock gives shareholders a valid claim on a portion of the company’s assets and earnings. The value of common stock can fluctuate based on the company’s performance, industry or sector trends, and overall market conditions (bull market vs. bear market).
As a shareholder, you financially benefit when the common stock price increases above the price you paid. This capital appreciation increases your portfolio value. You can choose to sell the common stock for a gain or keep holding the common stock in anticipation of even more gains. Additionally, common stockholders can generate passive income with the common stock of high dividend yielding stocks because the company issues cash payments to shareholders in the form of dividends.
Common stockholders also have residual claims on the company’s assets in case of business liquidation. Imagine a company declares bankruptcy and liquidates its assets. In that case, common shareholders are paid after all debt holders (e.g., bondholders), creditor obligations, and preferred shareholders have likewise repaid.
Take the Next Step:
Pros of Common Stock
Owning common stocks is one of the fastest ways to capture value in the equity capital markets. This security is accessible to anyone who can set up an online brokerage account. Here are some advantages to investing in common stock:
- Capital Gains: The difference between your purchase and selling price is your capital gain or loss. Short-term capital gains are taxed at your ordinary income tax bracket and are common stock purchases held for one year or less. Long-term capital gains are taxed at capital gains tax rates and are applicable if you own the common stock for more than a year.[2]
- Dividend Payments: While not all companies pay dividends, common stock can receive dividend payments. Passive income investors who chase dividends tend to focus on Dividend Aristocrats.
- Voting Rights: Common stock grants stockholders voting rights in company matters. You have a voice in annual board elections, executive compensation packages, and more. Activist investors sometimes purchase a large percentage of a company's stock to gain more sway in company strategy.
- High Liquidity: Common stocks will be great for your portfolio if you value liquidity. Publicly traded common stocks are liquid, and the company's market capitalization can affect their liquidity. Large-capitalization stocks are more liquid than small-cap stocks, making them incredibly attractive to investors who want flexibility.
Read Also: What Is a Dividend Reinvestment Plan (DRIP)
Cons of Common Stock
Successful investors know that they must compare and contract investment opportunities. With a buffet of investment options – bonds, real estate, commodities – to consider, investors must also consider the downside of investing in common stock. Here are some disadvantages to consider:
- Volatility: Common stock prices can be highly volatile. They are subject to individual company performance and macroeconomic conditions, like increases in interest rates, inflation, or the labor market.
- Unpredictable Income: Unlike many fixed-income assets, dividends from common stock are not guaranteed. Boards of directors can vote to decrease or halt dividend payments at any time.
- Liquidation Order: If a company goes into bankruptcy, most common stockholders lose their entire principal investment because they come last in line during asset liquidations.
Related: What Is the 4% Rule?
How to Buy Common Stock
Common stock is one of the most popular investment assets because it is easy to purchase. First, you need to find the best online stock brokerage account. Research brokerage accounts and look for ones with a low fee structure, access to a wide range of stocks, research portals, and excellent mobile apps.
Once you set up your stock brokerage account, you need to fund it by linking your bank account and transferring investment funds. You can also mail in a check or money order. From there, you only need to research stocks, place your first buy order, and monitor the stock's performance.
Learn More: What Is a Stock Trader?
Take the Next Step:
Member FDIC
Primis Checking Account
Account Type: Free Checking Account
Required Minimum: $1 to Open
Bonus Offer: Earn 50 Cents for Every Purchase
What Is Common Stock Repurchasing?
You might have heard about stock repurchasing, or stock buyback programs, in the news lately. Companies will buy back available shares from the stock market to reduce the company’s outstanding shares.
By reducing the number of shares outstanding, a company sends the message to "Wall Street" that it believes its stock is undervalued. Decreasing the number of outstanding shares increases the value of the remaining shares, which can help with financial metrics like earnings per share.
Companies can begin stock repurchase programs for many reasons, including returning excess cash to shareholders, improving base financials, or showing confidence in their prospects. For example, a company might think it is a better use of company cash to purchase its shares because it believes it can reissue them at a higher value.
Common vs. Preferred Stock
Common stock and preferred stock are the two main types of equity capital. They each have distinct characteristics and benefits. Here, we explore the differences:
- Preferred Stockholders: As a rule of thumb, preferred stockholders have better rights than common shareholders, which is why they are called "preferred." Although both preferred and common stockholders own the company, preferred stockholders exchange their voting rights for better financial terms. They usually do not have voting rights. However, they enjoy higher and more predictable dividends, as well as higher liquidation preferences, than common shareholders.
- Common Stockholders: Common stakeholders have ownership of the company and voting rights. This gives common shareholders a louder seat at the table. Their dividends are more variable and are not guaranteed. Common stock usually has a more significant potential for capital appreciation and financial returns, which is ideal for growth-focused portfolios.
Smart Summary
Investing in stocks is one of the best ways to increase your net worth over time. Common stocks represent most of all securities listed on major stock exchanges and can provide dividend income and capital appreciation. Choosing the right stock to invest in can be complicated. To help alleviate that pressure, you can consider investing in mutual funds, exchange-traded funds, or target-date funds.
You Might Also Like:
Frequently Asked Questions
Retail and institutional investors flock to purchasing common stock. In fact, indexes like the S&P 500 or Dow Jones are derived from their common stock holdings. Investing in common stock can boost your dividend income, increase your financial gains, and enhance your retirement savings.
By setting up an online stock brokerage account, you can get access to investing in thousands of different companies’ common stock. All you need to do is fund the account and get started trading. Smart Money Tip: Make sure you have budgeted to fund your account.
The U.S. Securities and Exchange Commission regulates initial public offerings and common stock once a company is publicly traded.
(1) U.S. Securities and Exchange Commission. Stocks. Last Accessed January 14, 2025.
(2) Internal Revenue Service. https://www.irs.gov/taxtopics/tc409. Last Accessed January 14, 2025.
