Common Stock Definition

What the common stock definition?

A common stock represents a small ownership piece of a company. For example, if a public company had 10 shares of common stock available and you owned 1 share, you'd basically own 10% of the company. In reality, most public companies have millions of shares.

Owning some common stock in a company allows you to partake of the profits from the company via dividends. However, the company is not required to pay dividends. In fact, many major companies do not pay a dividend.

As a part owner, you're also entitled to voting on company matters. Votes can be held for many reasons - such as electing people to executive positions.

Owning common stocks also gives you legal rights to the assets of the company. However, if the company is in a position where it needs to sell off its assets -- such as bankruptcy -- the bond owners, preferred shares owners and other creditors are payed first. Typically when a company goes out of business, there's little to nothing left for the common stock holders after the other creditors take their pieces.

A common stock value can be diluted by other types of stocks. If you're buying stock in a public company, it is important to read the fine print. You will often find out that your ownership percentage of the company is smaller than you thought due to, for example, preferred shares.

Not only can there be extra stocks out there that aren't immediately obvious, but companies can make and sell more stock just about any time they want. Again, this would dilute the value of any common stocks held in that company.

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