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Equity Securities

What Is Common Stock?

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When talking about securities, the most available (and generally most affordable) equity security is the common stock. When a company goes through incorporation, part of the process requires that the company offer shares of stock to investors so that the owners of the shares in turn become part owners of the company, and therefore have a stake in how the company operates and the profits or losses that it returns.

This is a reason why another name for shareholders or stockholders is also stakeholders.

The stock that the company may offer is divided into two main categories: common and preferred. Here, we will only be discussing common stock and we will save preferred for another time.

So what is special about common stock?

Common stock has many attractive features, including voting rights for certain events in the company, a potential for a high return on investment, and the possibility of a quarterly dividend paid out of a company’s profits.

The voting rights inherent in common stock allow the investor to vote on certain issues in the company, such as voting on the members of the Board of Directors. This feature truly showcases the fact that the owner of the stock really is a proportionate owner of the company, no matter how small their vote may seem compared to the amount of other investors.

Inherent in common stock also is the risk. But with great risk comes the potential for great reward. The potential to lose all of your investment in a common stock is matched by the possibility of unlimited gain in the years to come for that same stock.

Because the price of the stock is influenced by the valuation and performance of the company, the potential for a stock truly is unlimited (in either direction, so remember to use your best judgement and the consultation of a professional before any investment).

 


Disclaimer: This information does not constitute financial advice. For specific information regarding your financial situation, consult your local financial advisor.

By Foxx Financial

We are focused on financial literacy and a want to help others grow assets, reduce and remove debt, or just understand financial concepts better.

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