Saturday, November 17, 2018

Common Stock

Term Definition
Common Stock

The most basic of shares representing an equity ownership in a corporation.

One share of common stock is the most common unit of measurement of ownership in a corporation. Terms like earnings per share refer to amount of earnings a company has per each one (1) share of Common Stock. Common stock is usually the most junior form of equity security (in terms of dividends, liquidation rights and other rights that preferred stock may sometimes have). Holders of common stock hope for their investment to grow in value and are willing to invest in the same shares of common stock, without special rights, preferences and privileges.  Common stock is also normally the only security of a corporation in which a trading market might develop.  A corporation might issue securities representing a right to acquire shares of common stock. The value of the securities is in part derived from the potential value of a favorable conversion into common stock.  Usually, all of the company founders, management, employees, friends and family and other seed investors making early equity investments in a corporation are purchasing shares of common stock. However subsequent outside equity investors, such as an angel or a fund, would usually purchase preferred stock because preferred stock can be senior in terms of dividends, liquidation rights and other rights. Holders of common stock are entitled to vote for the election of directors and other matters requiring a stockholder vote (other than matters requiring solely a vote of another class or series of shares of stock pursuant to the terms of that class or series); to the payment of dividends (if any, declared by the corporation's Board of Directors in its sole and absolute discretion); and to receive a potential distribution of all remaining proceeds in liquidation (only if assets remain after satisfying all claims of the secured and unsecured creditors and bondholders, making any other government required payments, and satisfying the liquidation preferences of the preferred stockholders).