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Common Stock 


When they hear the word "investing", most people think of common stock. A share of common stock represents a proportional ownership interest in the corporation. In other words, common stocks are a type of equity (ownership) security. The total number of shares that investors (both individuals and institutions) own at any one time is known as the outstanding shares. If a corporation has 1000 shares of common stock outstanding, and you own 100 of those shares, then you are a 10 percent owner of the corporation. 

Characteristics of Common Stock 

  • Limited Liability.
  • Voting Privileges.
  • Priority of Claims in Bankruptcy.
  • Dividends.
      Limited Liability 
One of the principal benefits of common stock is that investors cannot lose more than 100% of their investment. No matter how much the company loses or how many bills of the company go unpaid, the common stockholders cannot be held personally liable. The reason is because a corporation is a separate legal entity under the law. 
      Voting Privileges 
Almost all common stocks carry the right to vote. Shareholders vote for, among other things, the selection of directors who are elected to see that the corporation is operated in accordance to the wishes of  the shareholders. Shareholders are also asked to vote on events such as mergers and acquisitions, changes in the company's capitalization , stock splits and other unusual actions. 
Voting is usually conducted either on a statutory basis or on a cumulative basis. Under the statutory basis which is the most common method, if four different directorship are up for elections and you have 100 shares of voting right, you could cast up to a 100 votes for your favorite for each seat or directorship. Using this method, shareholders with more than half the voting shares have absolute control over the company, since they always outvote everyone else. Under cumulative voting, you may save up all your voting shares and split them up any way you like. Given the same four directorships, you may choose not to vote for the first three and vote your 400 shares for the fourth candidate. Thus, cumulative voting gives minority shareholders their best chance of gaining representation on the board of directors. 
 
      Priority of Claims in Bankruptcy 
Common stock is the most "junior" security that a company offers. In other words, if the company falls on hard times, the first expense that is cut back is the dividend payments to the shareholders. If the company goes bankrupt, all the company's creditors, all of the bondholders, and all of the company's managers are paid off before the common stockholders receive a penny. As an owner, the shareholder is the last to get paid. 
 
      Dividends 
Common stockholders have the right to receive dividends wen and if declared by the board of directors. They decide whether the company can make a profit distribution and how large that distribution is. Companies make their dividend payments in a quarterly fashion and there are four days the investors need to be concerned with in respect to every dividend payment: 
1) On the declaration date, the board of directors announces the dividend, its amount and the day it is to be paid. 
2) The ex-dividend date is the first day on which the current owner is not entitled to the dividend. 
3) On the record date, the company examines its current list of shareholders. To receive the dividend, you must be on the company's list on that very date. If you are not, you do not receive the dividend. 
4) On the payment date, about two weeks after the record date, the company mails the checks. 

The dividend cycle is actually not that difficult to understand, but many of the clients at brokerage firms miss the point of owning the stocks on the record date. As a result, many investors who own stock when the checks are mailed do not receive any dividend payments because they did not own the stock as of the record date. 


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This page is created by Julia Lee '99 and is maintained by Professor Satyananda Gabriel of the Economics Department, Mount Holyoke College, January 1999.