common stock

  

Definition

Type of security that serves as an evidence of proportionate ownership, imparts proportionate voting rights, and gives its holder unlimited proportionate claim on the assets and income of the firm (after the claims of lenders, and other obligations, are satisfied). Common stock constitutes the equity capital (also called risk capital) of the firm which is never paid back (redeemed), and is lost if the firm fails. Common stock usually has a par value (amount for which each share is sold for when first issued) but has no guaranteed value afterwards. In bad years, common stock holders may receive little or no income (dividends) at all. But, in good years, there is no limit to the amount they may receive except the limits imposed by the government, the lenders, or the financial position of the firm. Common stock holders elect directors of the firm and thus participate in determining its policies and direction. But their claim on the firm's assets are subordinate to those of debenture holders, preferred stock (preference share) holders, creditors, and statutory agencies (such as tax authorities). On the winding up of the business, the surplus of the assets over liabilities is divided among common stockholders in proportion to their stockholding. Called ordinary shares in UK and most British Commonwealth countries.

For more information see Common Stock vs. Preferred Stock, and Stock Classes at InvestorGuide.com.


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