Purchase and sale of common stock: Overview, definition, and example
What is the purchase and sale of common stock?
The purchase and sale of common stock refers to the transaction process in which investors buy or sell shares of a company that represents ownership in that company. Common stock represents equity in a corporation and grants shareholders voting rights at the company’s annual meetings, along with the potential for dividends and capital appreciation. The purchase and sale of common stock occur in stock markets, where investors can buy and sell shares through brokers or directly through online platforms. The process is essential for raising capital for companies and providing liquidity to investors.
For example, an investor might purchase 100 shares of a publicly traded company’s common stock through the New York Stock Exchange, or a shareholder may sell their shares to another investor on the market.
Why is the purchase and sale of common stock important?
The purchase and sale of common stock are important because they allow companies to raise capital by selling ownership in their business, and they provide investors with an opportunity to participate in the growth and success of a company. These transactions help to create liquidity in the financial markets, enabling investors to buy and sell shares relatively easily. For businesses, selling stock is a way to raise funds for expansion, new projects, or other corporate needs without taking on debt.
For investors, the purchase and sale of common stock offer the potential for returns through both dividends and capital gains (if the stock price appreciates). The market for common stock is also a vital part of the broader economy, helping to determine the value of businesses and the flow of capital.
Understanding the purchase and sale of common stock through an example
Imagine an individual investor, John, who purchases 200 shares of a technology company’s common stock at $50 per share. Over time, the company grows, and the stock price increases to $75 per share. John decides to sell his 200 shares, realizing a capital gain of $25 per share, or $5,000 in total.
In another example, an investor named Sarah buys 1,000 shares of a well-established company at $100 per share. The company pays quarterly dividends of $2 per share, which Sarah receives as a return on her investment. If Sarah later sells her shares at $120 per share, she will benefit from both the appreciation in share price and the dividends paid during her ownership.
An example of a purchase and sale of common stock clause
Here’s how a purchase and sale of common stock clause might appear in a shareholder agreement or corporate document:
“The Shareholder agrees to sell [number of shares] of Common Stock of [Company Name] at a price of [specified price] per share to [Buyer Name]. The sale will be completed on [date], and the Buyer will assume all rights and privileges associated with the Common Stock purchased.”
Conclusion
The purchase and sale of common stock are fundamental activities in the financial markets, allowing companies to raise capital and giving investors the opportunity to invest in businesses and potentially generate returns. By participating in the purchase and sale of common stock, investors can gain ownership in companies, influence decision-making through voting rights, and benefit from dividends and capital gains. These transactions help fuel the economy by ensuring the movement of capital and providing liquidity for shareholders.
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.