Common Stock

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Common Stock</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="0%" align="left" valign="top"><p class="word_list"> <a href="#common stock">common stock</a><p class="word_list"> <a href="#dividends">dividend</a><p class="word_list"> <a href="#Equity">equity</a><p class="word_list"> <a href="#residual claim">residual claim</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="100%" align="left" valign="top"><p class="word_list"> <a href="#share">share</a><p class="word_list"> <a href="#shareholders">shareholder</a><p class="word_list"> <a href="#stock">stock</a><p class="word_list"> <a href="#stockholders">stockholder</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <p class="body"><b><a name="Equity">Equity</a></b> is an ownership interest in something. When a homeowner makes payments on his mortgage, he is said to "build equity" in the house. With each payment, his ownership interest increases as that of the mortgagee decreases. Equity is <a href="../articles/capital_allocation.htm">capital</a>.</p> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="right" id="table5"> <tr> <td align="right" width="9"> </td> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table><p class="body">If an asset is owned by multiple parties, each owner's equity is called a <b><a name="share">share</a></b> in that asset. A <b> <a name="stock">stock</a></b> is a <a href="../articles/security.htm">security</a> representing a share in a <a href="../articles/corporation.htm">corporation</a>. For this reason, the words "stock" and "share" are often used synonymously, although the latter is a more general concept.</p> <p class="body">When a corporation is first formed, investors contribute capital. Collectively, they own the corporation, and they receive stock representing their ownership interest. The investors are called <b> <a name="stockholders">stockholders</a></b> or <b><a name="shareholders"> shareholders</a></b>. The stock of the corporation is divided into equal shares, so an investor's ownership is proportional to the number of shares he holds. Usually, the capital investors first contribute to a corporation is in the form of cash. It could also be in the form of goods or services. For example, employees in a startup corporation sometimes receive stock as part of their compensation—their contribution is in the form of "sweat equity." </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="165" align="left" id="table6"> <tr> <td width="160"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td> <td width="11"> </td> </tr> </table> <p class="body">In any sort of joint ownership situation, the rights of individual owners must be balanced against a need to safeguard the interests of other owners. For example, it is in the best interest of all shareholders that individual shareholders are prohibited from trespassing on company property or having access to company trade secrets. Accordingly, shareholders have limited but clearly defined rights:</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10">voting rights: Shareholders elect members of the board of directors. They also may vote on certain issues affecting the corporation. Voting is generally conducted on a one-share-one-vote basis. Shareholders may appoint proxies to exercise voting rights on their behalf.</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="dividends">dividends</a></b>: When a corporation earns profits, these may be reinvested in the corporation, or they are paid out to shareholders as dividends. Usually, dividends are paid quarterly as an amount of cash per share. </p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10">transferability of shares: Shareholders may sell or otherwise legally transfer their shares to a third party of their choosing. Many stocks are actively bought and sold in stock markets.</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="residual claim">residual claim</a></b>: If a corporation is liquidated, the corporation's assets are applied to satisfy outstanding claims against the corporation—indebtedness, employee salaries, taxes, contractual obligations, etc. Shareholders have a residual claim on the assets. Any assets left over after all other claims have been met belong to them. Generally, those residual assets are liquidated, and the proceeds are distributed to shareholders as a fixed payment per outstanding share.</p> <p class="body">Another fundamental aspect of stock is the fact that owners enjoy <a href="../articles/corporation.htm">limited liability</a>. The corporation's liabilities are not their liabilities, so creditors of the corporation can not pursue shareholders to satisfy their claims against the corporation. For this reason, shareholders can lose no more than the capital they paid to acquire their stock. Stock can never have a negative <a href="../articles/valuation.htm">market value</a>.</p> <p class="body">While it is not the norm, some corporations issue multiple classes of stock. They may issue what is known as <a href="../articles/preferred_stock.htm">preferred stock</a>. To distinguish preferred stock from regular stock, we call the latter <b> <a name="common stock">common stock</a></b>. </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="right" id="table7"> <tr> <td align="right" width="9"> </td> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">Preferred stock is a form of <a href="../articles/hybrid.htm">hybrid</a> security that blends aspects of stocks and <a href="../articles/coupon_bond.htm">bonds</a>. Unlike common stock, whose dividend varies with the corporation's fortunes, preferred stock pays a fixed dividend. This is subordinate to other claims on the corporation, so the corporation cannot pay dividends on preferred stock unless it is current in meeting all claims of debtors, tax authorities, employees, etc. However, preferred dividends are superior to the claims of common stockholders, who can only receive a dividend when preferred dividends are also paid in full. </p> <p class="body">Rarely will a corporation issue multiple classes of common stock. When they do, it is usually to concentrate voting rights in one of the classes. For example, founders of a corporation might issue themselves one class of common stock and give another class to other equity investors.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table9"> <tr> <td width="100%"> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/coupon_bond.htm">bond</a> Securitized debt.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/capital_allocation.htm">capital</a> A firm's value—assets minus liabilities.</strong></p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/corporate_bond.htm">corporate bond</a> A bond issued by a corporation.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/corporation.htm">corporation</a> 1) A group of people, such as a guild or city, with a legal collective identity. 2) A joint-stock, limited liability corporation.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/par_value.htm">par value</a> A stated value for a security.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/preferred_stock.htm">preferred stock</a> Stock that is senior to common stock and pays a fixed dividend.</strong><p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/security.htm">security</a> A financial instrument such as a stock or bond.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/yield.htm">yield</a> Any of several metrics of the income or return to be earned from an investment.</strong></td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_1.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%">  <p class="ad_legend" style="margin-left: 0; 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