Common stock

Common stock is a kind of security. Holders of common stock receive pay outs from dividends and benefit from any appreciation in capital that the company experiences.

However, since it is also referred to as ordinary stock or share, it is also clearly distinguished from preferred stock. In case a company declares bankruptcy or decides to liquidate its assets for any reason, payouts will be issued first to holders of preferred stock, as well as bond holders.

Once all preferred stock have been issued their payments, payouts can then be made to common stockholders.
On the surface, it may seem as if common stockholders are at a disadvantage. After all, since there is always a risk that the company will not perform well enough to proceed with pay outs, prioritizing holders of preferred stock may come across as an additional disadvantage.

However, common stocks may also carry with them certain privileges which are not afforded to preferred stocks. For instance, preferred stocks do not usually grant voting rights to holders. Common stock often gives this right to stock holders, thus allowing them to influence decisions on the direction of the company, including policy, objectives, and election of board members. There are, however, common stocks which do not carry voting rights.

Aside from these, common stocks may also grant the stock holder preemptive rights. This simply means that holders of common stocks are given the option to maintain the same proportion of company ownership, should the company decide to issue a new stock offering. Should they want to, common stock holders may purchase additional shares in order to keep the original proportion of ownership.

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