Common Stock

Common stock represents ownership in a corporation and is the most common type of equity security issued by companies.

What is a Common Stock?

Common stock represents ownership in a corporation and is the most common type of equity security issued by companies. Here’s a detailed look at common stock:

Characteristics of Common Stock

Ownership and Voting Rights:
- Ownership: Holders of common stock have an ownership stake in the company. This ownership is proportional to the number of shares they hold.
- Voting Rights: Common stockholders typically have voting rights on key corporate matters, such as the election of the board of directors and major corporate policies. Each share usually grants one vote, although this can vary depending on the company’s structure.
Dividends:
- Variable: Dividends paid on common stock are not guaranteed and can fluctuate. Companies may pay dividends when they are profitable, but they can also choose to reinvest profits into the business or suspend dividends entirely.
- Distribution: Dividends are typically distributed on a per-share basis and are declared by the board of directors.
Residual Claim:
- After Debts and Preferred Stock: Common stockholders have a residual claim on the company’s assets, meaning they are entitled to receive any remaining assets after all debts, liabilities, and preferred stock dividends are paid in the event of liquidation.
- Risk and Reward: Because common stockholders are last in line during liquidation, they bear more risk compared to creditors and preferred stockholders. However, they also have the potential for higher returns through capital appreciation if the company performs well.
Market Value:
- Fluctuates: The market value of common stock can fluctuate based on the company’s performance, market conditions, and other factors. Stock prices are influenced by supply and demand dynamics in the stock market.

Accounting and Financial Reporting

Par Value:
- Nominal Value: Common stock may be issued with a par value, which is a nominal value assigned per share (e.g., $1 per share). The par value is often set at a very low amount and does not necessarily reflect the market value of the stock.
- Paid-In Capital: The amount received from issuing common stock above its par value is recorded as additional paid-in capital on the balance sheet.
Equity Section:
- Balance Sheet: Common stock is listed in the equity section of the company’s balance sheet. It’s usually categorized under “Common Stock” and may be accompanied by “Additional Paid-In Capital” if the shares were issued at a price higher than par value.
Earnings Per Share (EPS):
- Calculation: EPS is a key financial metric calculated by dividing net income by the number of outstanding common shares. It provides insight into the company’s profitability on a per-share basis.

Types of Common Stock

Class A and Class B Shares: Some companies issue multiple classes of common stock, which may have different voting rights or dividend policies. For example, Class A shares might have more voting rights compared to Class B shares.
Authorized, Issued, and Outstanding Shares:
- Authorized Shares: The maximum number of shares that a company can issue as defined by its charter.
- Issued Shares: The total number of shares that have been issued to shareholders, including those that are held by the company as treasury stock.
- Outstanding Shares: The number of shares currently held by investors, excluding treasury shares.

Example

If a company issues 1 million shares of common stock with a par value of $1 per share and sells them at $10 per share, the accounting treatment would be:

Common Stock: $1 million (1 million shares × $1 par value)
Additional Paid-In Capital: $9 million (1 million shares × ($10 – $1) per share)

In Summary

Common stock represents an ownership stake in a corporation and provides shareholders with voting rights, potential dividends, and a residual claim on assets. It is a fundamental component of a company’s equity and is crucial for understanding both the financial health and the ownership structure of a business.