Residual Claim to Assets

In the event of a company’s bankruptcy or liquidation, common stockholders have the right to receive their proportional interest in residual assets. After all the other security holders have been paid, along with all creditors of the corporation, common stockholders may claim the residual assets. For this reason common stock is the most junior security.

Common stock can be classified into a number of categories. Each category details the characteristics associated with the underlying company.

  1. Blue chip: strong, stable and mature, with a long history of consecutive quarterly dividends; may also be a suitable investment for an investor with an income objective.
  2. Growth: strong potential for improving profits. The company's earnings are growing faster than the overall economy, and thus the stock has a strong potential for outperforming the market.
  3. Emerging growth industry: young firm in new industry with good growth prospects, but also high-risk.
  4. Income: mature company with high dividend yield and few prospects for growth or diversification. These are typically utility companies; however, they may also be blue chip companies.

Another way to classify common stock is based on the characteristics of the industry

  1. Cyclical stocks move with the broader market - and often with greater volatility - so they outpace the market during an expansion but whipsaw back during a contraction. Automotive stocks are one example.
  2. Counter-cyclical or defensive stocks do better in bear markets, when investors are looking for safe places - that are not affected greatly by economic currents - to park their money. Companies in the food, health care and defense industries are all examples.
  3. Speculative or special situation stocks are those that, for whatever reason, an investor believes will rise quickly in market price. There can be an element of guesswork here, but other factors may be at play too. Often, these are companies emerging from reorganization or bankruptcy. Sometimes investors will be drawn by the fact that a company's incompetent or corrupt management is being replaced by turnaround specialists. Alternatively, it might be that a company is either fundamentally undervalued or selling at the low end of its historic trading range and is thus ripe for a sharp upward movement in stock price.


Dividends and Stock Splits

Related Articles
  1. Investing

    Valuing A Company Using The Residual Income Method

    Learn the underlying basics behind the residual income model and how it can be used to place an absolute value on a firm.
  2. Investing

    Explaining Residual Value

    Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life.
  3. Investing

    Income, Value and Growth Stocks

    Investors who buy stocks generally seek one of three criteria: undervalued holdings, growth potential or steady income. The characteristics of stocks in each of these categories differs accordingly.
  4. Investing

    The Alphabet Soup Of Stocks

    Are the countless stock categories leaving you puzzled? Here we help you sort through the confusion.
  5. Investing

    Banking On Blue Chip Stocks

    Discover what makes blue chip stocks such attractive investments.
  6. Financial Advisor

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  7. Managing Wealth

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  8. Investing

    5 Reasons You Should Love Stocks

    Despite their volatility, stocks as a whole have historically risen in value over time more than any other type of investment.
  9. Managing Wealth

    Taking The Bite Out Of A Bear Market

    Find out which financial instruments will protect you from bear market volatility.
  10. Investing

    Why Apple Can Be a Value Stock But Not a Defensive Stock (AAPL)

    Examine Apple's 2016 price decline to identify its potential as a value stock. Contrast Apple's characteristics with defensive stocks.
Frequently Asked Questions
  1. Can I fund a Traditional IRA, a 403(b) or a Roth IRA using pension money?

    Can pension money be used to fund other retirement accounts?
  2. What are unregistered securities or stocks?

    Before securities, like stocks, bonds and notes, can be offered for sale to the public, they first must be registered with ...
  3. How does a company move from an OTC market to a major exchange?

    The over-the-counter market is not an actual exchange like the NYSE or Nasdaq. Instead, it is a network of companies that ...
  4. Can I roll a traditional IRA into a 529 college account for my grandchild?

    The short answer: Not without paying taxes. But as with much of the tax code, there are various nuisances and exemptions ...
Trading Center