Common stock: Definition, rights and how it works

What is common stock?

Common stock is a type of equity that represents ownership in a company. When you buy common shares, you become a shareholder with rights tied to that ownership.

These rights usually include the ability to vote on board elections and major corporate matters. Some companies issue multiple classes – for example, Class A common stock may provide stronger voting power than Class B.

Common stockholders may also receive dividends. These are distributions of company profits, but they aren’t guaranteed. Management decides whether to issue dividends and how much to pay.

Finally, shareholders have a residual claim on assets if the company is liquidated. They are last in line, after bondholders and preferred stockholders, which makes common stock riskier but also positions it for greater long-term rewards.

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How do common shares work?

Common shares work by putting ownership rights into practice. Each share represents a slice of the company, and holding that slice allows you to participate in its future.

In practice, this plays out in three main ways:

• Voting rights: Shareholders vote in elections and on select corporate policies, usually one vote per share.
• Dividends: If profits are distributed, common shareholders may receive a portion. Unlike preferred stock, payouts can rise, fall or be skipped entirely.
• Capital gains: If the company grows and the stock price rises, you can sell shares for more than you paid.

The value of common stock moves with market demand, earnings results, growth prospects, and broader sentiment. That can lead to long-term gains, depending on performance, but also exposes investors to volatility and potential losses.

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Common stock vs preferred stock

Common stock and preferred stock are both forms of equity, but they work differently. Common stock emphasizes ownership rights and growth potential, while preferred stock prioritizes income stability and payout priority.

Key differences include:

• Dividends: Preferred stock usually pays fixed dividends. Common stock dividends are variable and can be reduced, increased or skipped.
• Voting rights: Common stockholders typically vote in corporate elections. Preferred stockholders generally do not.
• Liquidation priority: Preferred stockholders rank above common stockholders if a company is dissolved. They receive payment first.
• Price potential: Common stock offers greater long-term appreciation, while preferred stock behaves more like a bond with limited upside.

Class A vs Class B

As mentioned, some companies issue multiple classes of common stock and one class may carry stronger voting rights, while another focuses on broader ownership with fewer votes per share. Alphabet, Berkshire Hathaway and Meta are examples of companies with different share classes.

Benefits and risks of common stock

Benefits of common stock

• Ownership: Buying common stock makes you a part-owner of the company, with voting rights that give you a voice in major decisions.
• Potential for capital growth: If the company performs well, the value of its shares can rise over time, offering the potential for gains (but there’s always the risk of losses).
• Dividends: If distributed, dividends provide an additional source of income. Reinvesting them can compound returns and accelerate portfolio growth, though results may vary.
• Liquidity: Most common stocks are actively traded on exchanges, making them relatively easy to buy, sell or adjust within a portfolio.
  

Risks of common stock

• Volatility: Share prices can swing daily based on earnings results, market conditions and investor sentiment, which may feel unpredictable.
• Dividend uncertainty: Unlike preferred stock, dividends on common shares are never guaranteed and can be reduced or suspended during tough periods.
• Liquidation risk: In the event of bankruptcy, common shareholders are last in line for repayment, behind creditors and preferred stockholders.
• Potential total loss: If a company collapses entirely, common stock may lose all value, leaving shareholders with nothing.

How to evaluate common stock

When analyzing common stock, investors look at financial metrics and qualitative factors to assess strength and potential. Some widely used measures include:

• Earnings per share (EPS) – A company’s profit divided by the number of shares. Higher EPS often signals better profitability.
• Price-to-earnings (P/E) ratio – A valuation metric that compares share price to earnings. It helps assess whether a stock is expensive or cheap relative to peers.
• Dividend yield – The percentage return from dividends compared to share price. This helps investors understand income potential.

Other factors include management quality, competitive advantage and industry trends. Evaluation is about context. Numbers tell part of the story, but a complete picture requires looking at the business model, market environment and long-term prospects.

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FAQs about common stock

What rights do common stockholders have?

Common stockholders usually have the right to vote on key matters, receive dividends if declared, and claim assets if the company is liquidated.

Do common stocks pay dividends?

Some do, but not all. Dividends on common stock are variable and depend on company profits and management decisions.

What is Class A vs Class B common stock?

Class A common stock may carry stronger voting rights than Class B, though structures vary by company. Prices can also differ based on demand and rights attached.

What happens to common stock in bankruptcy?

Common shareholders are last in line. Bondholders and preferred shareholders receive payouts first. In many cases, common stockholders may receive little or nothing.

How do I buy common stock?

You can buy common stock through trading platforms or brokerages. On Crypto.com, you can search, compare, and purchase common shares directly within the app.

What are common shares?

Common shares are another way of saying common stock. Both terms refer to equity ownership with voting rights and variable dividends.

How do common stocks work in practice?

They provide ownership, potential dividends, and price appreciation opportunities. At the same time, they expose investors to volatility and the risk of losses if the company underperforms.

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