What Is Common Stock? (2024)

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Common stock is a type of tradeable asset, or security, that equates to ownership in a company. If you own common stock in a company, you have the right to vote on things like corporate policies and board of director decisions. Common stock is just one type of stock traded on public exchanges.

In this guide, we’ll go over:

  • Common Stock Definition
  • Who Uses Common Stocks?
  • Preferred Stock vs. Common Stock
  • How to Calculate Common Stock
  • Related Investing Skills

Common Stock Definition

Common stocks are essentially shares of ownership. These stocks are the types most people invest in on the stock market or public exchange. When you own a common stock, or a share, you may be eligible for dividends — and if the company does well, you may get a part of that profit. Additionally, shareholders can vote on big company decisions. For that reason, common stocks have a lot of value outside of money: if you can help decide who’s running a large company, you have the power to make some real-world changes.

However, some companies may also sell common stock that’s not eligible for voting rights. For example, Google (also known as Alphabet on official documentation) has two types of common stocks available: voting and non-voting. Non-voting common stocks are still valuable, though! Because these are publicly traded assets, there’s still room to turn profits from selling shares if a company does well.

>>MORE: Learn if investment banking is a good career path.

Who Uses Common Stocks?

Because common stocks are publicly traded, practically anyone can invest in them. Corporate finance professionals, such as investment bankers, may use common stock prices on the exchange as an indicator of a company’s performance. Additionally, one aspect of investment banking is bringing private companies through the initial public offering (IPO) process, making the company public. Once the company is publicly traded, it will likely issue common stocks.

Personal finance advisors and financial advisors often guide their clients through the purchase or sale of a variety of company common stocks. Stockbrokers, too, facilitate the buying and selling of these common stocks.

Ultimately, most positions in the investing industry will likely interact with common stocks one way or another.

What Is Common Stock? (1)

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Preferred Stock vs. Common Stock

Another type of stock often at play is preferred stocks. A preferred stock does not come with any voting rights but does come with more monetary benefits than common stocks. For example, preferred stock shareholders receive dividends on their investment before any common stock shareholders.

One downside of common stock is that it’s the lowest rung on the payment plan if things go wrong. For example, if a company goes bankrupt, preferred stockholders, creditors, and bondholders must receive their payments first before common stockholders receive any money.

However, common stock tends to offer better returns in the long run. While you have a lot of risk if a company goes bankrupt, common stocks offer high returns on investment if a company does well.

Another key difference between common stock and preferred stock is that preferred stock is affected by interest rates. If interest rates rise, preferred stocks lose their value. On the other hand, the supply and demand of the market determine common stock prices.

>>MORE: Learn if finance is a good career path.

How to Calculate Common Stock

The common stock is the number of shares in a company or the number of pieces of ownership. Every company has a balance sheet, which shows the company’s assets, liabilities, and stockholder equity. To figure out how much of a company’s value is held in stockholder equity, you can subtract the company’s liabilities from its total assets.

Common Stock Formulas

Value of Common Stock

If a company has only issued common stock, rather than also having preferred stock or treasury stock (shares bought back by the company itself), you can calculate common stock value with this formula:

Common Stock = Total Equity – Retained Earnings

Retained earnings are how much the company keeps after it has paid out expenses and dividends.

Outstanding Common Stock Shares

To figure out how many shares of common stock a company has available, use this formula:

Outstanding Common Stock = Number of Issued Shares – Treasury Stocks

Companies can only issue a certain number of shares, but they can issue less than their authorized amount. Companies may also buy back outstanding shares, creating treasury stocks. Calculating the number of outstanding shares is useful in corporate strategy to determine if more stocks can (or should be) issued and if the company should buy back any shares.

What Is Common Stock? (2)

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Understanding common stocks and why they are important is an essential skill for anyone working in finance or investing. Other crucial skills for investing professions include:

  • Completing discounted cash flow (DCF) valuations
  • Using Excel
  • Calculating the weighted average cost of capital (WACC)
  • Understanding debt capital markets

You can learn these skills (and more!) with Forage’s Investment Banking Skills Passport.

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What Is Common Stock? (3)

Written by

McKayla Girardin→

Writer

Read more from McKayla Girardin

McKayla Girardin is a NYC-based writer with Forage. She is experienced at transforming complex concepts into easily digestible articles to help anyone better understand the world we live in.

As a seasoned financial expert with a deep understanding of investment concepts, I bring a wealth of knowledge to the table, ensuring that the information provided is not only accurate but also insightful for those seeking to grasp the intricacies of the financial world. My expertise is rooted in years of practical experience, staying abreast of industry trends, and a commitment to continuous learning.

Now, let's delve into the key concepts covered in the provided article:

Common Stock Definition:

Explanation: Common stocks represent shares of ownership in a company and are traded on public exchanges.

Expert Insight: Common stocks grant shareholders the right to vote on significant company decisions, making them integral to corporate governance.

Who Uses Common Stocks?

Explanation: Common stocks are publicly traded, making them accessible to a wide range of investors.

Expert Insight: Professionals in corporate finance, such as investment bankers, use common stock prices as indicators of company performance. Investment advisors, financial advisors, and stockbrokers facilitate the buying and selling of common stocks.

Preferred Stock vs. Common Stock:

Explanation: Preferred stocks offer different benefits compared to common stocks, such as receiving dividends before common stockholders.

Expert Insight: Despite lacking voting rights, preferred stocks provide more monetary benefits. However, common stocks offer potentially higher returns in the long run.

How to Calculate Common Stock:

Common Stock Formulas:

1. Value of Common Stock:

  • Formula: Common Stock = Total Equity – Retained Earnings
  • Expert Insight: Retained earnings reflect what a company keeps after covering expenses and dividends.

2. Outstanding Common Stock Shares:

  • Formula: Outstanding Common Stock = Number of Issued Shares – Treasury Stocks
  • Expert Insight: Calculating outstanding shares aids in corporate strategy, determining if more stocks should be issued or if the company should buy back shares.

Additional Investing Skills:

Expert Insight: Understanding common stocks is crucial for finance professionals. Essential skills include discounted cash flow (DCF) valuations, Excel proficiency, calculating the weighted average cost of capital (WACC), and comprehending debt capital markets.

By mastering these concepts and skills, individuals can navigate the complexities of finance and investing, contributing to informed decision-making in the dynamic world of financial markets.

What Is Common Stock? (2024)

FAQs

What do you mean by common stock? ›

Common stock represents shares of ownership in a corporation and the type of stock in which most people invest. When people talk about stocks, they are usually referring to common stock. In fact, the great majority of stock is issued in this form.

What is a common stock for dummies? ›

Common stock is a security that represents ownership in a corporation. In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid.

What is common stock vs preferred stock? ›

Preferred stock receives preferential treatment, meaning, those stockholders are paid first if there are any assets left to liquidate when a company goes under. Common stockholders are only paid after preferred stockholders are paid.

What is the difference between shares and common stock? ›

Of the two, "stocks" is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, "shares" has a more specific meaning: It often refers to the ownership of a particular company.

What is an example of common stock? ›

It's common for companies to have millions or billions of outstanding shares that represent the company's overall ownership. Because of this, common stock is referred to as an equity security. Example: Coca-Cola is the issuer of Coca-Cola stock. Example: the investor is long (owns) 100 shares of GE stock.

Why do you buy common stock? ›

Common stock isn't just common in name only; this type of stock is the one investors buy most often. It grants shareholders ownership rights, allows them to vote on important decisions such as electing the board of directors and gives them a say in certain policy decisions and management issues.

What are the disadvantages of common stock? ›

Investors with common stocks own voting rights without any stress of company legalities. However, the profitability of most common stocks is limited because they are prioritized in payouts and the company's freedom to defer dividends until funds are largely available.

What is another name for common stock? ›

Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Commonwealth realms.

How do you get common stock? ›

Common stocks can be purchased on the public markets, as well as through private marketplaces (FYI, private markets are less flexible, less accessible, and less easy to buy or sell compared to public markets). In public markets, stocks can be bought and sold throughout the day on stock exchanges.

Who owns common stock? ›

Owners of common stock, called shareholders, are entitled to the following rights: Voting rights to elect the members of the board of directors. Typically, shareholders may cast one vote per share. However, shareholders may establish deviations from this one-vote-per-share default rule in the corporation's charter.

Who buys preferred stock? ›

Therefore, investors looking to hold equities but not overexpose their portfolio to risk often buy preferred stock. In addition, preferred stock receives favorable tax treatment; therefore, institutional investors and large firms may be enticed to the investment due to its tax advantages.

Which one thing do you always have with common stock? ›

In general, common stock comes with the right to vote for corporate directors, as well as the right to vote on policy changes and stock splits. There are a few exceptions to this rule, however, such as companies that have two classes of common stock -- one voting and one non-voting.

What is 100 shares of stock called? ›

In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.

Where does common stock go on a balance sheet? ›

Part of the Equity Section: On a balance sheet, common stock is listed under the equity section because it shows the money investors gave to the company.

What's another word for common stock? ›

Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Commonwealth realms.

Why would a company issue common stock? ›

Raising capital: Issuing common stock is an effective way for companies to raise funds for growth and expansion, research and development, paying off debt, or financing other business needs without incurring additional debt.

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