Common Stock: What It Is, Different Types, vs. Preferred Stock

Common stock represents a residual ownership stake in a company, conveying the right to participate in corporate decision-making and potentially benefit from capital appreciation and dividends. Its value is reflected in the company's stockholder's equity. Here's a detailed analysis: 1. **Ownership and Decision-Making Rights**: Common stockholders have voting rights, typically one vote per share, allowing them to elect the board of directors and vote on significant corporate policies. 2. **Capital Appreciation and Dividends**: Common stockholders are entitled to a company's residual profits, which can be realized through capital appreciation and dividends. The former is the increase in share value, while the latter is a distribution of a company's earnings, though dividends are not guaranteed and vary based on the company's performance. 3. **Liquidation Priority**: In the event of a company's liquidation, common stockholders have a claim on the remaining assets after creditors and preferred stockholders are repaid. 4. **Investment Risks and Rewards**: Common stock is generally riskier than preferred stock but offers a higher potential return. Its value is tied to the company's performance and market conditions, meaning it can fluctuate significantly. Historically, common stocks have provided higher long-term returns than preferred stocks or bonds, though this comes with higher volatility. 5. **Classification and Company Control**: Some companies issue different classes of common stock to preserve control. For example, one class might have more voting rights than another. This dual classification is common in closely held companies. In conclusion, common stock is a type of equity that offers ownership rights, the potential for capital appreciation and dividends, and a say in corporate decisions, though it also comes with higher risk and volatility compared to preferred stock.