What is Common Stock?

Common stock is an ownership share in a corporation. The holders of common stock have voting rights at shareholder meetings and the opportunity to receive dividends. If the corporation liquidates, then common stockholders receive their share of the proceeds of the liquidation after all creditors and preferred stockholders have been paid.

Advantages of Common Stock

There are multiple advantages associated with holding common stock, which include the following:

Potential returns. The residual earnings and value of a business accrue to its common stockholders. This can result in substantial rewards if a business is highly profitable. Historically, stock holdings have outperformed other mainstream forms of investment.
Dividend income. The board of directors of a corporation may vote to issue dividends to its common shareholders. Though not guaranteed, larger and more stable entities may issue substantial amounts of dividends over time.
Voting rights. Common shareholders have the right to vote at shareholder meetings on such matters as board elections, mergers, and various corporate policies. This gives them a high level of influence over the business.
Liquidity of holdings. If common stock has been issued by a publicly-held corporation and those shares are registered, then shareholders can trade them with relative ease (assuming that the shares are listed on a stock exchange).
Residual claim. As equity owners, common stockholders have a residual claim on a company’s assets after all obligations have been settled and its preferred stockholders have been paid off.

Disadvantages of Common Stock

Common stockholders are paid last if a business liquidates, so there is a significant risk that they will lose all their money if a corporation goes bankrupt.

Common Stock Par Value

In many states, law requires that a par value be assigned to each share of common stock. Par value is technically the legal price below which a share of stock cannot be sold. In reality, par value is routinely set at the minimum possible amount, and is not even required under the incorporation laws of some states. Thus, par value is irrelevant in most cases.

Presentation of Common Stock

The dollar amount of common stock recognized by a business is stated within the equity section of the company balance sheet. The amount of common stock that a business records is split between the common stock account and the additional paid-in capital account; the sum total recorded matches the price at which the company sold shares to its investors.