Owning Common Stock / by kevin murray

Approximately 47% of Americans own some common stock, usually through a retirement account of a particular mutual fund or funds, although you can also trade on the stock exchange for shares of common stock that appeal to you for one reason or another.  But what really does common stock represent?  I mean what is it that you are receiving for providing your hard-earned money to a mutual fund or for buying shares of Apple? 

 

First off, as you might expect, there are different types of stock, for instance, you might work for a company that issues you restricted stock, which typically means that until you have worked for that company for a certain number of months or years, that restricted stock is not available to you, because you have not accomplished the criteria for the restricted stock to be vested, but once vested, those restricted shares will become in essence the same as you owning common stock in said company and consequently material assets to you.  Additionally, there is preferred stock , as you might suspect just based on the name alone, preferred stock has more rights than common stock, such as the fact that in any insolvency of a company, it is the preferred stockholders that must be paid before any common stockholders receive a dime; additionally, whereas dividends are paid to common stockholders at the discretion of the board of directors to which they can increase or decrease or suspend the dividend, for preferred stockholders the dividend is paid regularly, and should that dividend be missed for any reason, because that dividend is guaranteed by the virtue of owning preferred stock, preferred stockholders will receive any mandated dividend payments before any dividends can be paid to common stockholders.

 

Companies may also issue different classes of stock, to which one stock class "A" will have greater voting rights than another stock class "B".  Although both classes of stock will have the same claim upon the profits of the company and its dividend payments per share, having less of a voting right, usually substantially less at perhaps a 1:100 ratio, means that company insiders have typically majority control over the company's voting rights, and consequently means that they are never in a position to which their aggregate vote can be challenged by any outside parties, including especially the lower class stockholders.

 

So at the end of the day, what does the typical common stockholder really own, when he buys stock of a particular company?  He essentially owns the right to receive his just due from any dividends approved and issued by the Board of Directors of said company, voting rights per his ownership and share class status, typically the right to attend the corporation's annual shareholder meeting, also the right to a copy of the company's annual report, as well as the ability to trade in or out of the particular stock at his own volition.

 

So why buy shares of common stock in the first place?  Usually, this is done because there is a belief that said company will make more often than not a profit, demonstrate growth in sales, and issue dividends that in whole will push the stock price up so on an annual basis the overall return of your common stock will be at a greater rate or a better return than other investments that you could select such as CDs or bonds or real estate or whatever.