What is Common Stock? Key Insights and Investment Strategies
Investors and traders have choices when selecting investment products to help meet their investment goals. Common stocks are one popular security choice. They offer different pros and cons, provide features different from preferred stock, and more. Let's dive in.
What is common stock
Common stock is a type of security that represents ownership in a company. When purchasing common stock, you're buying a small portion of the company, and you become a shareholder. As a shareholder, you have certain rights and benefits, such as voting on the company's leadership and policies, and on the board of director's members.
You are also entitled to receive a share of the company's profits in the form of dividends and if the company is liquidated or goes bankrupt, you have a claim to the company's assets after all other debts and liabilities are paid.
Examples of common stock include shares from companies like:
Apple (AAPL)
Microsoft (MSFT)
Alphabet (Google)
Amazon (AMZN)
Coca-Cola (KO)
JPMorgan Chase (JPM)
Tesla (TSLA)
How common stock works
When you purchase common stock, you become a part-owner of the company that gives you certain rights as we discussed above. Usually, each share of common stock equals one vote; however, some companies issue different classes of stock with different voting powers (e.g., "Class A" and "Class B" shares).
Owning common stock gives you ownership in a company with the potential to earn dividends and benefit from capital appreciation as the company grows. However, it carries more risk than other forms of investment, such as bonds or preferred stock, because common shareholders are the last to be paid in the event of liquidation.
Shareholder rights
Shareholders of common stock can have the following rights:
Elect the board of directors, vote on major corporate issues, and offers rights to attend and participate in shareholder meetings.
Share in the company's profits through dividends (if declared).
Have a claim on assets and residual profits.
Ability to buy, sell, and transfer shares freely.
Rights to maintain ownership percentage in some cases and to inspect financial records and reports.
Legal recourse in cases of wrongdoing by management.
Potentially profit through stock price appreciation.
Protection from losses beyond the initial investment.
Common stock vs. preferred stock
Common stock | Preferred stock | |
Voting rights | Holders have voting rights in the company and can participate in decisions about corporate policy and board of directors elections. | Typically, holders do not have voting rights. |
Dividends | Eligible, but not guaranteed; they are paid out at the discretion of the board of directors. | Typically fixed but must be paid before any dividends are given to common stockholders. |
Liquidation preference | Last in line to claim any remaining assets, following bondholders and preferred stockholders. | Higher claim on assets as these holders are paid out before common stockholders. |
Convertability | Cannot be converted into other security forms. | Must be converted to common shares based on terms. |
Volatility | Generally more since they are more alert to company performance and market conditions. | Less from their fixed dividends and greater claim on assets. |
Market partcipation | Holders benefit directly from increases in the company's value. | Typically don't participate in the company's growth beyond the fixed dividends. |
What is preferred stock
Types of common stock
Growth stocks: Issued by companies that are growing quickly. Shareholders can earn money from the increase in value per share; they also have voting rights and receive dividends.
Value stocks: Issued by companies that are undervalued by the market. Investors can buy shares in these companies and wait for the market to recognize their true value.
Penny stocks: Common shares that trade for less than $1 per share; however, some financial publications define penny stocks as being under $5 or $10.
Microcap stocks: Issued by companies with a small market capitalization. They are often traded on stock exchanges that don't have minimum standards for stock holders or net assets.
Hybrid stocks: Combination of two or more types of stocks such as a security that is 50% common stock and 50% preferred stock
Why do investors trade common stocks
Trading common stocks offers both opportunities for gains and the risk of losses, as stock prices can fluctuate based on company performance, economic conditions, and broader market sentiment. Investors typically trade common stocks for several reasons:
Capital appreciation: Investors hope the stock price will rise over time, allowing them to sell shares at a higher price than they bought them.
Dividends: Some common stocks pay dividends, providing investors with regular income in addition to potential stock price increases.
Voting rights: Common stockholders often have voting rights in corporate decisions, such as electing board members or approving major business policies.
Liquidity: Common stocks are highly liquid, allowing investors to buy and sell shares quickly on major exchanges like the NYSE or NASDAQ.
Portfolio diversification: Trading in common stocks allows investors to diversify their holdings, spreading risk across different sectors, industries, or geographies.
Speculation: Some investors trade stocks based on short-term market trends or events, hoping to profit from quick price movements.
How to invest in common stock in the moomoo app
There are two ways to place an order for U.S. stocks.
Go to the moomoo app, tap Accounts> Quick Trade, enter order information, tap Buy or Sell, and enter your transaction password in the Unlock Trade pop-up window.
In the moomoo app, tap a stock to access the Quotes page, tap Trade, enter order information, tap Buy or Sell, and enter your transaction password in the Unlock Trade pop-up window.
Potential pros and cons of common stock
Potential pros
Possible stock price growth
May receive a portion of profits through dividends
Can influence corporate decisions with voting rights
Easy to buy and sell shares because of liquidity
Risk limited to investment
Opportunity to spread risk from diversification
Potential cons
Stock price volatility and risk of loss
No guaranteed payments from dividends
New stock issues can reduce ownership percentage
Little influence compared to large shareholders
Less access to insider info
FAQs about common stocks
Why are common stocks issued?
Common stock is issued primarily to raise capital without incurring debt, fund growth, and expansion; this also provides an ownership stake to investors. It allows companies to avoid debt and use stock as a form of currency for acquisitions and employee compensation. Additionally, issuing common stock can improve a company’s credibility and market visibility, diversify ownership, and support its long-term growth goals.
What is the difference between equity and common stock?
Equity is the broader term that includes common stock as one component. Common stock is a specific type of equity. Equity exists in multiple forms, including private equity or preferred stock, while common stock specifically refers to publicly traded shares in a company.
Common stockholders typically have voting rights and potential for dividends, while other forms of equity (like preferred stock) may not offer voting rights but provide priority in dividend payouts.
Is common stock an asset or equity?
No, common stock is not an asset but it is considered equity, which represents ownership in a compan. It falls under the equity section of the company’s balance sheet.
For a company, when it issues common stock, it is raising capital from shareholders in exchange for a share of ownership in the company. For a shareholder, if you own common stock, it is considered an asset for you personally that you can hold, sell, or trade; it may increase or decrease in value based on the company’s performance and market conditions.
What's the difference between common stock and ordinary shares?
Common stock and ordinary shares are the same thing: a type of security that represents ownership in a company. Common stock is the most common type of stock purchased by investors. Its shares enable stockholders to vote on company matters, receive dividends, ownership, and raise money for goals such as expansion, debt repayment, and acquisitions.
Are there other different types of stock?
Yes, there are many stock types, including:
Preferred stocks: A type of security that has some characteristics of both stocks and bonds. Preferred stockholders don't usually have voting rights, but they have a higher claim on a company's assets and earnings than common stockholders.
Blue chip stocks: A stock from a company that's a market leader or top performer in its sector. Blue chip stocks are often included in major stock market indexes, like the S&P 500.
Growth stocks: A stock from a company whose price is increasing faster than the market average. Growth stock companies often don't pay dividends, instead investing in further growth.
Value stocks: A stock from a company that's currently undervalued in the stock market. Value stocks companies may have strong fundamentals, but their stock prices may not reflect their true value.
Large-cap, mid-cap, and small-cap stocks: Stocks are categorized by their market capitalization, which is the total worth of all their shares. Large-cap stocks have the highest market capitalization, followed by mid-cap stocks, and then small-cap stocks.
