Common stock is a type of security that represents ownership in a corporation. If you own common stock, you have the right to vote on important corporate matters, such as electing directors and approving mergers. You also have the right to receive dividends, which are payments from the company’s profits. However, you also face the risk of losing your investment if the company goes bankrupt or performs poorly.
How Common Stock Works
Common stock is issued by corporations to raise capital for their business operations. When you buy common stock, you become a part-owner of the company. You can buy and sell common stock through brokers or online platforms, such as the New York Stock Exchange (NYSE) or the Nasdaq.
The price of common stock depends on the supply and demand of the market. The price can go up or down depending on various factors, such as the company’s earnings, growth prospects, industry trends, and investor sentiment. The price can also be affected by external events, such as economic conditions, political developments, and natural disasters.
The return on common stock comes from two sources: dividends and capital appreciation. Dividends are payments that the company makes to its shareholders from its profits. Dividends are usually paid quarterly, but they are not guaranteed. The company’s board of directors decides whether to pay dividends or reinvest the profits in the business. Capital appreciation is the increase in the value of the stock over time. You can realize capital appreciation by selling your stock at a higher price than you bought it.
Benefits and Risks of Common Stock
Common stock offers several benefits to investors, such as:
- Ownership rights: As a common shareholder, you have a say in how the company is run. You can vote on important corporate matters and influence the direction of the company.
- Profit potential: As a common shareholder, you can benefit from the company’s growth and success. You can receive dividends and capital appreciation from your investment.
- Liquidity: As a common shareholder, you can easily buy and sell your stock in the market. You can access your money whenever you need it.
However, common stock also involves several risks, such as:
- Market risk: As a common shareholder, you are exposed to the fluctuations of the market. Your stock price can go down due to factors beyond your control. You can lose some or all of your investment if the company fails or performs poorly.
- No fixed income: As a common shareholder, you are not entitled to a fixed income from your investment. The company may not pay dividends or may reduce them at any time. You have to rely on capital appreciation for your return.
- Low priority: As a common shareholder, you are at the bottom of the priority ladder in case of liquidation. If the company goes bankrupt or is sold, you will only receive your share of the assets after all creditors, bondholders, and preferred shareholders are paid in full.
Types of Common Stock
There are different types of common stock that have different characteristics and rights. Some of the common types are:
- Class A and Class B shares: Some companies issue two classes of common stock with different voting rights. Class A shares usually have more voting power than Class B shares. For example, Google’s Class A shares have one vote per share, while its Class B shares have 10 votes per share.
- Growth stocks: These are stocks of companies that have high growth potential and reinvest most of their profits in their business. Growth stocks usually do not pay dividends but offer high capital appreciation. For example, Amazon is a growth stock that has increased its value by over 2,000% in the past 10 years.
- Value stocks: These are stocks of companies that are undervalued by the market and trade at low prices relative to their fundamentals. Value stocks usually pay dividends and offer low capital appreciation. For example, Coca-Cola is a value stock that has increased its value by about 100% in the past 10 years.
How to Invest in Common Stock
If you want to invest in common stock, here are some steps you can follow:
- Set your goals and risk tolerance: Before investing in any security, you should know why you are investing and how much risk you are willing to take. You should also consider your time horizon and diversification needs.
- Choose a broker or platform: To buy and sell common stock, you need an account with a broker or an online platform that allows you to trade securities. You should compare different options based on their fees, services, features, and reputation.
- Research and analyze stocks: To select which stocks to invest in, you need to do some research and analysis on different companies and industries. You should look at their financial statements, earnings reports, growth prospects, competitive advantages, and risks. You should also use various tools and methods, such as fundamental analysis, technical analysis, and valuation ratios, to evaluate the stocks.
- Buy and sell stocks: Once you have decided which stocks to invest in, you can place your orders through your broker or platform. You can use different types of orders, such as market orders, limit orders, stop orders, and trailing stop orders, to execute your trades. You should also monitor your portfolio performance and adjust your strategy as needed.
Common stock is a type of security that represents ownership in a corporation. It gives you the right to vote on corporate matters and receive dividends. It also offers you the potential to profit from the company’s growth and success. However, it also exposes you to the risk of losing your investment if the company fails or performs poorly. There are different types of common stock that have different characteristics and rights. You can invest in common stock by following some steps and using some tools and methods.