Understanding Common Stock..The Asset Class to Know

Often referred to as equity, common stock is a product a company may issue to raise additional capital to further fund business expansion. When you as an investor purchase common stock in a company,  you are buying a share of ownership in the company’s net worth. 

Historically, having equity ownership over the long term has yielded higher returns for investors but there is a little bit more you should know.

Rights: Stockholders have the right to vote on matters in regard to the board of directors, and other important decisions impacting potential business outcomes. A proxy(absentee ballot) is made available for those who are not able to attend/ or listen in on shareholder meetings but still want to participate. 

You also have the right to sell your shares through your broker at any moment you seem fit for yourself and can also transfer ownership to another as a gift. 

Growth: As the market price of the stock increases, you will have gained due to capital appreciation(a fancy way of saying your stock went up in price). Please take note though, stock prices can also decrease in value and you as a common stockholder bear all the lost and gain of the company. 

Stocks over the long-term have proven to be the best tool for hedging against inflation but are subject to decline particularly over the short-term. Full loss of principal occurs when a company liquidates in the event of bankruptcy. 

Dividend Income: Many investors choose common stock not just for the goal of appreciation of capital over the long term, but also for the passive stream of income from dividend payments. Dividends are controlled by the board of directors and in certain instances may be discontinued or reduced.

Low Priority at Liquidation: In the event a company files for bankruptcy and is forced to liquidate, common stockholders are last in priority behind debt and preferred stockholders. 

This is one of the more inherent risks an investor takes on when purchasing shares of common stock. However, you as a shareholder are not liable to sell any further assets to pay for company debts in this instance. The only potential lost is the principal of your investment if this event were to occur.