Common stock: Overview, definition and example
What is common stock?
Common stock represents ownership in a company and entitles shareholders to a portion of the company’s profits through dividends, as well as voting rights in certain company decisions. Common stockholders are typically the last to be paid in the event the company is liquidated, after creditors and preferred stockholders. This type of stock is the most common form of equity issued by companies.
Why is common stock important?
Common stock is important because it allows investors to share in the company’s growth and success. As the company grows, the value of the common stock can increase, offering potential capital gains for shareholders. Voting rights also give shareholders a voice in major corporate decisions, such as electing board members or approving mergers and acquisitions. Common stock is often used by companies to raise capital for expansion and development.
Understanding common stock through an example
For example, if you purchase common stock in a tech company, you become a partial owner of that company. If the company performs well, the stock price may rise, and you may receive dividends. However, if the company faces financial difficulties, your shares may decrease in value, and you may not receive dividends if the company chooses to reinvest its earnings.
An example of a common stock clause in a contract
In an agreement related to the issuance of stock, a clause like this might be included:
"The Issuer agrees to issue common stock in accordance with the terms and conditions set forth in this agreement, with each share providing the right to vote and participate in the company's profits, as outlined in the company’s charter."
Conclusion
Common stock is a key element of corporate ownership and a fundamental way for companies to raise capital. It provides investors with the potential for growth, through both dividends and appreciation in stock value, while also giving them a say in the company's direction. Understanding common stock is essential for both investors and businesses looking to raise funds or offer ownership stakes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.