What are common shares?

When you decide to step into the world of investing, the first thing you encounter is “stock.” But as you dig deeper, you realize that not all stocks are created equal. The most common type—and the one that forms the backbone of the global financial system—is Common Stock, also known as Ordinary Shares.

If you own common stock, you aren’t just a number on a spreadsheet; you are a partial owner of a corporation. Whether it’s a local tech startup or a global powerhouse like Apple, owning common stock gives you a seat at the table of capitalism. In this comprehensive guide, we will explore the rights, risks, and rewards of common stock, and why it remains the favorite wealth-building tool for investors worldwide.

What is Common Stock? The Foundation of Equity Ownership

At its most basic level, common stock represents a claim on a portion of a company’s assets and profits. When a company “goes public,” it divides its ownership into millions of tiny pieces called shares. When you buy one of those shares, you become a shareholder.

The Concept of Equity

In the financial world, “equity” is another word for ownership. Unlike a bondholder, who is essentially a lender to the company, a common stockholder is an owner.

• Bondholders are like the bank that holds your mortgage; they want their interest and their money back.

• Common Stockholders are like the homeowner; they benefit if the home’s value goes up, but they also bear the risk if the roof leaks or the market crashes.

Common stock is the most popular form of equity because it offers the highest potential for long-term growth. While it doesn’t offer the “guaranteed” income of a bond, it allows you to participate in the unlimited upside of a successful business.

The Power of the Vote: Corporate Governance and Shareholder Rights

The defining characteristic that separates common stock from other types of securities is voting rights. As an owner, you have a say in how the company is managed.

What Do You Vote On?

Common stockholders typically vote on:

1. The Board of Directors: These are the individuals responsible for overseeing the company’s management and protecting shareholder interests.

2. Corporate Policy: This includes major changes like mergers, acquisitions, or changes to the company’s charter.

3. Stock Splits: Decisions to increase the number of shares to make them more accessible to investors.

4. Executive Compensation: Increasingly, shareholders are given a “say on pay” regarding the salaries and bonuses of top executives.

One Share, One Vote

In most cases, the rule is “one share, one vote.” If you own 1,000 shares, you have 1,000 votes. Large institutional investors (like mutual funds or pension funds) often hold millions of shares, giving them significant influence over a company’s direction.

The Proxy Statement: Most individual investors don’t attend annual meetings in person. Instead, the company sends out a “Proxy Statement” (Form DEF 14A) via mail or email, allowing you to cast your votes digitally.

Dividends: How Common Stockholders Get Paid

While common stock is primarily a “growth” investment, it can also be a source of income through dividends. A dividend is a portion of a company’s earnings that the board of directors decides to “pay back” to the shareholders.

Are Dividends Guaranteed?

Unlike preferred stock or bonds, dividends on common stock are never guaranteed. A company can pay a dividend for 50 years and then stop tomorrow if they hit a rough patch or decide to reinvest that money into a new project.

Dividend Growth

The beauty of common stock is the potential for dividend growth. As a company becomes more profitable, it may increase its dividend payout. This is a primary strategy for “Income Investors” who look for “Dividend Aristocrats”—companies that have increased their dividends every year for at least 25 consecutive years.

Capital Appreciation: The Engine of Wealth Creation

While dividends are nice, the real reason most people buy common stock is for Capital Appreciation. This is a fancy way of saying “the stock price goes up.”

If you buy a share of a company for $50 and, five years later, the company has doubled its profits and expanded globally, the market might now value that share at $150. You have made a profit of $100 per share. This “buy low, sell high” dynamic is how the greatest fortunes in history have been built.

The Impact of Compounding

When you combine capital appreciation with reinvested dividends, you trigger the “Eighth Wonder of the World”: Compound Interest. Over decades, common stocks have historically outperformed almost every other asset class, including real estate and gold, due to this compounding effect.

Common Stock vs. Preferred Stock: A Critical Comparison

To truly understand what you are buying, you must distinguish between the two main “flavors” of equity.

The Strategic Choice: If you want to grow your wealth over 20 years and have a say in the company, you buy Common Stock. If you are a retiree who just wants a steady check and less price movement, you might choose Preferred Stock.

The Dark Side: Risks and the Liquidation “Pecking Order”

There is no such thing as a free lunch in finance. The high potential of common stock comes with significant risks.

1. Market Risk and Volatility

Common stock prices can be incredibly volatile. They are influenced by earnings, the economy, interest rates, and even social media trends. It is not uncommon for a “solid” common stock to drop 20% or 30% in a few weeks during a market correction.

2. The Bottom of the Pile (Liquidation Risk)

This is the most critical risk to understand. If a company fails and goes bankrupt, there is a strict order in which people are paid from the remaining assets:

1. Bondholders and Lenders: They are the first to get paid.

2. Suppliers and Employees: Owed wages and invoices.

3. Preferred Stockholders: They get whatever is left after the debt is settled.

4. Common Stockholders: They get whatever is left at the very end.

In most bankruptcies, common stockholders get nothing. This is why common stock is considered the “riskiest” part of a company’s capital structure.

Dual-Class Stock Structures: When Your Vote Counts Less

In recent years, a new trend has emerged in Silicon Valley and beyond: Dual-Class Stock. Companies like Alphabet (Google), Meta (Facebook), and Berkshire Hathaway use this structure.

• Class A Shares: Usually the shares available to the general public, carrying 1 vote per share.

• Class B Shares: Often held by founders and insiders, carrying 10 votes (or more) per share.

This allows founders like Mark Zuckerberg or Larry Page to maintain total control of the company even if they own less than 50% of the total equity. As a common stockholder in these companies, your vote is more of a “suggestion” than a deciding factor.

Stock Splits and Reverse Splits: What They Mean for You

You might wake up one day and find that you own twice as many shares as you did yesterday, but the price of each share has been cut in half. This is a Stock Split.

Why Split?

A company splits its stock to make it more affordable for retail investors. If a stock is trading at $2,000 per share, it’s hard for a beginner to buy even one share. By doing a 10-for-1 split, the price becomes $200.

Important Note: A stock split does not change the value of your investment. It’s like cutting a pizza into 8 slices instead of 4; you still have the same amount of pizza.

The Reverse Split

A reverse split is usually a sign of trouble. A company whose stock has dropped to $\$0.50$ might do a 1-for-10 reverse split to bring the price up to $\$5.00$. This is often done to avoid being “delisted” from major exchanges like the NYSE or NASDAQ, which have minimum price requirements.

How Common Stocks are Created: The Lifecycle of a Share

How does a share of common stock actually get into your brokerage account? It follows a specific lifecycle.

1. The Private Phase

The company is owned by founders, “angel” investors, and venture capitalists. The shares are not traded on any public exchange.

2. The IPO (Initial Public Offering)

The company decides to “go public” to raise money for expansion. They hire investment banks to sell millions of shares of common stock to the public for the first time. This is the Primary Market.

3. The Secondary Market

Once the IPO is over, the shares trade on an exchange (like the NYSE). When you buy stock on an app, you are buying it from another investor, not the company. This is the Secondary Market.

Tax Implications of Owning Common Stock in the U.S.

To maximize your returns, you must understand how the “tax man” views your shares.

Capital Gains Tax

• Short-Term Capital Gains: If you sell your stock for a profit after holding it for less than a year, you are taxed at your ordinary income tax rate.

• Long-Term Capital Gains: If you hold for more than a year, you are taxed at a much lower rate (usually $0\%$, $15\%$, or $20\%$).

Dividend Tax

• Qualified Dividends: Most dividends from U.S. common stocks are “qualified,” meaning they are taxed at the lower long-term capital gains rate.

• Non-Qualified Dividends: Taxed as ordinary income.

Why Every Portfolio Needs Common Stocks

Despite the risks of volatility and bankruptcy, common stocks are an essential component of a diversified portfolio for three reasons:

1. Inflation Protection: Companies can raise prices as inflation rises, which helps their stock price keep pace with or exceed the cost of living.

2. Liquidity: You can buy or sell common stocks in seconds during market hours. Unlike real estate, which can take months to sell, common stock is “instant” cash.

3. Ownership in Innovation: Buying common stock allows you to profit from the greatest inventions of the future—from AI and renewable energy to life-saving medicine.

Embracing the Role of a Shareholder

Common stocks are the ultimate instrument of economic participation. By purchasing ordinary shares, you transition from being a consumer to being a producer and an owner. You are betting on the ingenuity of management, the hard work of employees, and the overall growth of the economy.

While the “pecking order” of liquidation puts you at the bottom, the “pecking order” of growth puts you at the very top. Understand the risks, focus on the long term, and remember that as a common stockholder, you aren’t just betting on a ticker symbol—you are investing in the future of a business.