Common stock is the fundamental ownership equity of a company. It is a security that represents ownership in a corporation. The investor in common stock thus occupies a position directly comparable to that of the owner of a firm or factory.
Common stock bears the main burden of the risk of the enterprise and also receives the lion’s share of success. Among other things, the holders of the common stock elect the board of directors.
Common stock may be defined as the residual ownership of a corporation, which is entitled to all assets and earnings after the limited claims have been paid and which has basic voting control.
Key Notes:
- 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.
- Investors should diversify their portfolios by putting money into different securities based on their appetite for risk.
Characteristics of Common Stock:
- Common Stockholder has unlimited ownership rights to the remaining gains from the business after other security holders have received their contractual payments.
- It bears the principal hazard and risk of the business.
- Common stock may be sold by its holder to any willing buyer.
- The earnings of the common stockholders may be unstable
- Common stock prices fluctuate extensively.
- Common stocks in general are price-level hedges.
- Dividends are normally less than the earnings on the common stockholder’s equity.
Classifications of Common Stock
There is no unified classification of common stock. However, some companies may issue two classes of common stock.
In most cases, a company will issue one class of voting shares and another class of non-voting (or with less voting power) shares.
The main rationale for using dual classification is to preserve control over the company.
Despite the difference in voting rights, different classes usually enjoy the same rights to the company’s profits.
How to Calculate Common Stock
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.
How Does Common Stock Differ From Preferred Stock?
Common stock is the most widely available type of shares issued by a company and what you will likely encounter when trading stocks on an exchange.
These shares typically come with voting rights but are the last in line in the preference ordering of being repaid if a company goes bankrupt.
Preferred shares come ahead of common stock in that ordering. Preferred shares also often lack voting rights, but do come with regular and higher dividend payments.
In this respect, preferred shares are sometimes considered to be a hybrid between bonds and common stock.
