A share of common stock represents an ownership stake in a company and confers a broad range of ownership rights and benefits on a common stockholder. Besides common stock, some companies also issue preferred stock. Preferred shareholders enjoy preferential treatment in regard to dividends and claims in bankruptcy liquidation, but have limited rights in other respects.
Unlimited Upside Potential
Common stock gives its holders the opportunity to fully share in a company’s growth. Regardless of how a company performs, its bondholders are only entitled to receive at maturity the face value of their bonds. Preferred stock owners have a call provision -- the ability of the issuer to call, or redeem, the shares at par, or face value, after a set date. This limits the upside potential.
If a corporation decides to pay a dividend, common stockholders are entitled to receive it in proportion to their stock ownership. Dividends can be paid in cash, common stock or property, which typically involves shares in a subsidiary being spun off.
A stockholder cannot lose more than his stake in a company. He cannot be assessed by the company or be held liable for the actions of the company.
A common shareholder has the right to vote at annual shareholder meetings on the affairs of a corporation and to elect the board of directors. The number of votes a common stockholder can cast equals the number of shares owned. Whether an investor owns 10 shares or 10,000 in a company, shareholders always act in their own best interest, which is to make money. A small stockholder can take comfort in knowing that shareholders with similar concerns are likely to vote the same way.
Liquidity refers to the ease at which shares are converted to cash without disrupting the stock price. Most common stocks are very liquid, trading hundreds of thousands of shares a day. Most bonds and preferred stocks can also be sold at any time, but have less liquidity, which means that sellers may have to accept a lower price than their stake is currently worth on paper. If a bondholder does nothing and holds a bond to maturity, he will get back its full face value, provided the company does not default. A preferred stockholder can hold shares until they are called at par.
- “PassTrak Series 7: General Securities Representative License Exam”; Dearborn Financial Services; 2003