What Is Common Stock? Definition and How to Invest - NerdWallet (2024)

If you’re very new to investing, you might still be getting familiar with what a stock is — and you might be distressed to find that there are, in fact, several different types of stocks.

Here, we’re looking at common stock, which as its name suggests, is the “regular” type that you’re most likely to deal with as an investor.

Common stock definition

Common stock is a share of ownership in a company. It typically gives its owner the right to vote on the company’s leadership — the board of directors.

Depending on the company, common stock may also entitle its owner to a share of the company’s profits, in the form of dividends.

This is more common in some sectors of the stock market — such as the energy sector — but less common in others, such as the technology sector. Typically, energy companies such as oil stocks like to return profits to shareholders, while technology stocks prefer to reinvest them in their own growth.

Between its potential voting rights and the possibility of dividend payments, common stock has a lot of upsides.

It has one unique downside, however. In the event that a company goes bankrupt and has to sell off all of its assets, common stock owners are the last to get any money from those sales. Owners of the company’s bonds and preferred stock take priority.

Common stock vs. preferred stock

Common stock is the “default” type of stock, but it’s not the only type. There’s also preferred stock, which differs from common stock in its voting rights, dividend payment process and priority level in the case of company bankruptcy.

Common stock usually comes with voting rights, while preferred stock doesn’t.

Preferred stock gets its name because it has higher priority than common stock for dividend payments and liquidation payments (sales of company assets in the event of bankruptcy). In other words, those shares are preferred over common shares when there’s a question about who gets paid first. As a result, preferred stock dividends are usually higher and more reliable than common stock dividends. Companies can raise, lower or even stop paying their common stock dividends at will, whereas preferred dividends are generally fixed.

What is a repurchase of common stock?

In the process of analyzing a stock, you may come across press releases the company publishes for investors. One common topic of these press releases is the “repurchase of common stock.” What does that mean?

A repurchase of common stock is also known as a stock buyback. It happens when a company buys shares of its own stock from other investors.

Common stock repurchases can push up a company’s stock price in the short term. But the question of whether they’re good for companies in the long term is more complicated. Stock buybacks don’t actually change anything about the company’s operations or financial results.

How to buy common stock

If you’re looking to buy common stock and you’re completely new to investing, the first step is to open a brokerage account if you don’t already have one.

Next, you’ll need to decide specifically how you want to invest in common stock. Index mutual funds and exchange-traded funds allow investors to buy dozens or hundreds of individual stocks in a single investment and can be convenient for building a long-term portfolio.

Investing directly in individual stocks can take a little more work — and entails a little more risk — but also has the potential to yield much higher returns than index funds. Make sure to research stocks thoroughly before buying them to make sure you understand the potential upsides and downsides of the investment.