Common Stock

views updated May 17 2018

Common Stock

What It Means

Common stock is the most prevalent form of ownership of a public company, which is a corporation that is owned by public investors. Anyone who gives money to the company in exchange for partial ownership of that company is a public investor. By contrast, a private company is owned by a small group of individuals who usually have a direct involvement in the company’s operations. Ownership of a public corporation is apportioned into a set number of shares, each of which represents a fraction of ownership in the company. Stockholders, or shareholders, are those individuals who own stock in a particular company.

There are several basic characteristics of common stock that distinguish it from other forms of stock. For one, owners of common stock have the right to vote directly on matters related to the functioning of the company. Owners of preferred stock, which is a stock that guarantees the shareholder the first right to receive a dividend (a payment, usually distributed four times a year, that companies pay to shareholders, generally based on the overall performance of the company during that quarter), do not share the right to vote on company matters. Preferred stock is the second most typical form of ownership in a publicly owned company.

Capital stock generally refers to the total number of stock shares that a company is authorized to sell to investors. A company’s capital stock is related to the amount of money the company is able to invest in its own growth. In other words if a company is confident in its potential for increased profitability (its capacity for earning more money), it will increase the number of shares it makes available to the public, thereby increasing its capital stock. Companies generally use additional money raised by increases in capital stock to invest in projects or equipment designed to expand their business. The term capital stock is also used more broadly to refer to a company’s full offering of both common and preferred stock.

Blue-chip stocks are the stocks of companies that have a reputation for continued high performance and profitability over a considerable period of time. Blue-chip stocks are considered a safe investment because they tend to pay consistent dividends, regardless of the overall state of the general economy. Because blue-chip companies tend to enjoy large earnings, blue-chip stocks tend to have a high price and to pay a more modest (but reliable) dividend. The name blue-chip is derived from the blue chips (generally those having the highest value) used in poker games. Blue-chip stocks are sometimes referred to as bellwether stocks.

When Did It Begin

The history of common stock remains a subject of debate among economists and scholars. In their article “The First Multinationals: Assyria circa 2000 bc ,” published in 1998 in Management International Review (a journal dedicated to the study of business management), economics professors Karl Moore and David Lewis argued that the practice of issuing common stock originated with the Assyrians in the year 2000 bc . The Assyrians inhabited Mesopotamia, a region in the Middle East that lies in present-day Iraq, Syria, and Turkey.

The first-known printed share or stock certificate, a document demonstrating legal proof of ownership of shares in a corporation, was issued in the year 1606. It was issued by the Dutch East India Company, a multinational corporation (a company that oversees business in more than one country) founded in the Netherlands in 1602. A few of these original Dutch East India Company share certificates still exist.

More Detailed Information

Shareholders who own common stock have the unique right to vote on issues relating to the company. Each share is worth one vote, so the number of votes held by individual shareholders is directly related to the number of shares of common stock they own. Shareholders owning common stock vote to elect the corporation’s board of directors (the group responsible for making decisions regarding the operation of the company), to help determine the company’s goals and objectives, and to approve stock splits. A stock split occurs when a company decides to divide each outstanding, or already owned, share of stock into two or more shares; it is accompanied by a proportional lowering of the value of each share. For example, if a company decides to split its stock in two, a shareholder who previously owned one hundred shares of stock at $10 per share will now own two hundred shares of stock worth $5 per share. A stock split does not alter the overall value of a shareholder’s stake in the company. By splitting their stock and subsequently lowering share prices, companies attempt to attract new shareholders.

There are several other distinctive features of common stock. One involves the issuing of a share certificate, which serves as proof of the shareholder’s equity, or ownership, in the company. Secondly, shareholders who own common stock have the right to examine all documents relating to the operation of the company, including bookkeeping accounts, which maintain a record of all the company’s financial transactions. Holders of common stock also have what is known as a preemptive right, which entitles them to purchase additional shares of common stock in proportion to the amount of stock they already own before any additional shares of the stock becomes available to the general public. Additionally, owners of common stock receive a pro rata, or proportional, share of corporate dividends. When a corporation goes out of business, however, owners of common stock are the last to be compensated. They must wait until the company’s debts (monies owed) have been repaid and the owners of preferred stock have received compensation before they receive their share of whatever funds remain.

Recent Trends

One of the most important gauges of common stock levels is the Dow Jones Industrial Average (often called the Dow), an index measuring the performance of 30 leading American companies through an analysis of their stock value. While the Dow measures all forms of stock, it consists predominantly of common stock and is therefore a reliable indicator of the general performance of common stock at any given time. The Standard and Poor’s 500 (S&P 500) index includes 500 large corporations and is often seen as a more reliable indicator of the performance of the stock market.

In mid-2006, after several months of low or moderate growth, common stock prices began to rise steadily at the same time that the price of oil, which had reached record high levels earlier in the year, began to decline. As oil prices went down, investors had more money to invest in the stock market, and the Dow Jones industrial average began to rise, exceeding 12,500 (in broad terms, the sum of the stock prices of the thirty companies that comprise the Dow) for the first time ever on December 27, 2006.

common stock

views updated May 18 2018

com·mon stock • pl. n. (also com·mon stocks) shares entitling their holder to dividends that vary in amount and may even be missed, depending on the fortunes of the company. Compare with preferred stock.

Common Stock

views updated Jun 08 2018


Evidence of participation in the ownership of a corporation that takes the form of printed certificates.

Each share of common stock constitutes a contract between the shareholder and the corporation. The owner of a share of common stock is ordinarily entitled to participate in and to vote at stockholders' meetings. He or she participates in the profits through the receipt of dividends after the payment of dividends on preferred stock. Shares of common stock are the personal property of their holder.