Definition: The type of stock that corporations most often sell to raise money, which gives them several rights.
Example: Apple Inc. has billions of shares of common stock outstanding. Each of these shares may be voted when elections are held for each of the members of the Board of Directors. The current Board members are shown here.
Investeach explains: Each share of common stock normally entitles the owner to:
* vote for members of the company’s Board of Directors
* vote on major company changes, such as whether to buy out another company
* receive dividends if the Board of Directors elects to have the company pay them
* maintain his or her percentage of ownership in the company by purchasing a certain amount of new shares the company issues in the future, called pre-emptive right
Should the company go out of business in a process called liquidation, common shareholders are the last to be paid with whatever money may be left after selling the company’s assets and paying other parties, such as bondholders and shareholders, who have a higher priority.
As compared to investing in bonds or preferred stock, common stock is the most risky. It has the most upside, meaning that there’s no limit to how high a company’s common share price may go. It is only fair that they have a bigger downside, which is why if the corporation goes under, common shareholders are the last in line last to be paid. This is why common shareholders are also referred to as residual owners. The root of the word residual is residue, or what’s left over.
Recently, corporations such as Alphabet and Facebook have gone against capital raising norms by issuing two classes of common stock, one which has voting rights and one which has little or no voting rights. The objective is to leave the founders with the voting shares so that they can continue to set the direction of the corporation.
While it is not stated, the stock quotes that come up when people visit sites like finance.yahoo.com and finance.google.com are for common shares.
Riddle me this:
1. What are three privileges of being a holder of common shares?
2. What name can we give to common shareholders that reflects them being “last in line” to be paid if the company goes out of business?
3. Identify two other parties who will get in line ahead of common shareholders.
4. What is the reason why common shareholders are willing to be last in line if things go badly?
5. What is the term we use to describe the process of a company going out of business?
6. In what way are Alphabet and Google putting a twist on the issuance of common stock?