Understanding Common Stock:

Common stock represents residual ownership in a company—the shares themselves are how ownership of a portion of the company is legally represented. The owners of common stock own a right to claim a share of the company’s profit, and normally the right to vote on important company policies and actions and in the election of the company’s board of directors.

This section will explain how these features of common stock ownership work in practice.

Common stockholders have a right to receive a proportional share of the company’s profits. Common shareholders usually receive their share of the profits through dividend payments.  These dividends are paid out differently from company to company.

Common stock almost always comes with voting rights. Common shareholders vote on corporate actions and policies, and they elect the board of directors. Most common stock shares come with 1 voting right per share, meaning that if you had 100 shares, you could cast 100 votes. This voting is usually conducted at the company’s meeting of the shareholders, although investors can vote by proxy instead of attending these meetings in person.

Common stock represents the lowest liquidity position in the capital stack. This means that common stock investors get paid after all of the other debtholders, creditors, bondholders, and preferred stockholders do. Because they are paid out last, this makes investing in common stock more risky than other types of investing. Common stock investors need to understand that if the company goes bankrupt, then they will be the last to get paid out—meaning they probably won’t get their money back.

Common stockholders also generally both expect and realize the largest returns out of all the other investors. The risk that an investor takes in investing in common stock (the lowest liquidity position) is offset by the potentially higher returns they can make if the investment prospers. Common stock shares tend to outperform other investments over the long term but are more susceptible to short-term volatility.

Common Stock Classifications:

Common stock can have different classifications, and some companies may issue more than one classification of common stock.

The rationale behind issuing more than one classification of common stock is probably to limit the number of shares with voting rights in order to maintain control over the company. Here are three common ways that common stock can be classified with regards to voting rights.

The term “ordinary share” generally refers to common stock where each share has one voting right. Shares of common stock can also be classified as “super voting” shares. These shares come with more than one vote per share, as specified by the company issuing them. Companies can also issue “non-voting” shares of common stock. Ownership of these shares comes with no right to vote on company matters. In practice, “non-voting” common shares are rare as investors in common stock may alternatively be able to purchase preferred shares which also don’t have voting rights but have a higher liquidity position and are less risky to the investors.

Regardless of the impact of voting rights on various classifications of common stock, common shares usually have the same claim to the company’s profits.

Recommended Reading:

• Capital Stack Quick Guide
• Equity Financing
• Preferred Stock