20 Investments: Common Stock
AAA
  1. 20 Investments: Introduction
  2. 20 Investments: American Depository Receipt (ADR)
  3. 20 Investments: Annuity
  4. 20 Investments: Closed-End Investment Fund
  5. 20 Investments: Collectibles
  6. 20 Investments: Common Stock
  7. 20 Investments: Convertible Security
  8. 20 Investments: Corporate Bond
  9. 20 Investments: Futures Contract
  10. 20 Investments: Life Insurance
  11. 20 Investments: The Money Market
  12. 20 Investments: Mortgage-Backed Securities
  13. 20 Investments: Municipal Bonds
  14. 20 Investments: Mutual Funds
  15. 20 Investments: Options (Stocks)
  16. 20 Investments: Preferred Stock
  17. 20 Investments: Real Estate & Property
  18. 20 Investments: Real Estate Investment Trusts (REITs)
  19. 20 Investments: Treasuries
  20. 20 Investments: Unit Investment Trusts (UITs)
  21. 20 Investments: Zero-Coupon Securities
  22. 20 Investments: Conclusion

20 Investments: Common Stock

What Is It?
Stock is sometimes referred to as shares, securities or equity. Simply put, common stock is ownership in part of a company. For every stock you own in a company, you own a small piece of the office furniture, company cars, and even that lunch the boss paid for with the company credit card. More importantly, you are entitled to a portion of the company's profits and any voting rights attached to the stock. With some companies, the profits are typically paid out in dividends. The more shares you own, the larger the portion of the company (and profits) you own.

Common stock is just that, "common". The majority of stocks trading today are in this form. Common stock represents ownership in a company and a portion of profits (dividends). Investors also have voting rights (one vote per share) to elect the board members who oversee the major decisions made by management. In the long term, common stock, by means of capital growth, yield higher rewards than other forms of investment securities. This higher return comes at a cost, as common stock entails the most risk. Should a company go bankrupt and liquidate, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. (To learn more about stocks, see our Stock Basics Tutorial.)

Objectives and Risks
Over the long term, no investment provides better returns at a reasonable risk than common stock. History dictates that common stocks average 11-12% per year and outperform just about every other type of security including bonds and preferred shares. Stocks provide potential for capital appreciation and income and offer protection against moderate inflation.

The risks associated with stocks can vary widely, and they usually depend on the company. Purchasing stock in a well-established and profitable company means there is much less risk you'll lose your investment, whereas purchasing a penny stock increases your risks substantially. If you use margin, you can also dramatically increase your leverage in a stock, but this is only recommended for experienced investors.

How to Buy or Sell It

The most common method for buying stocks is to use a brokerage, either full service or discount. There is no minimum investment for most stocks (other than the price per share), but many brokerages require clients to have at least $500 to open an account. Dividend reinvestment plans (Drips) and direct investment plans (DIPs) are two ways individual companies allow shareholders to purchase stock directly from them for a minimal cost. DRIPs are also a great way to invest money at regular intervals.



Strengths
  • Common stock is very easy to buy and sell.
  • Thanks in large part to the growth of the Internet, it is very easy to find reliable information on public companies, making analysis possible.
  • There are over 11,000 public companies in North America to choose from.

  • Weaknesses
  • Your original investment is not guaranteed. There is always the risk that the stock you invest in will decline in value, and you may lose your entire principal.
  • Your stock is only as good as the company in which you invest - a poor company means poor stock performance.

  • Three Main Uses
  • Capital Appreciation
  • Income
  • Liquidity
  • 20 Investments: Convertible Security

    1. 20 Investments: Introduction
    2. 20 Investments: American Depository Receipt (ADR)
    3. 20 Investments: Annuity
    4. 20 Investments: Closed-End Investment Fund
    5. 20 Investments: Collectibles
    6. 20 Investments: Common Stock
    7. 20 Investments: Convertible Security
    8. 20 Investments: Corporate Bond
    9. 20 Investments: Futures Contract
    10. 20 Investments: Life Insurance
    11. 20 Investments: The Money Market
    12. 20 Investments: Mortgage-Backed Securities
    13. 20 Investments: Municipal Bonds
    14. 20 Investments: Mutual Funds
    15. 20 Investments: Options (Stocks)
    16. 20 Investments: Preferred Stock
    17. 20 Investments: Real Estate & Property
    18. 20 Investments: Real Estate Investment Trusts (REITs)
    19. 20 Investments: Treasuries
    20. 20 Investments: Unit Investment Trusts (UITs)
    21. 20 Investments: Zero-Coupon Securities
    22. 20 Investments: Conclusion
    RELATED TERMS
    1. Strike Width

      The difference between the strike price of an option and the ...
    2. Inverse Transaction

      A transaction that can cancel out a forward contract that has ...
    3. Reference Equity

      The underlying equity that an investor is seeking price movement ...
    4. Boundary Conditions

      The maximum and minimum values used to indicate where the price ...
    5. Best To Deliver

      The security that is delivered by the short position holder in ...
    6. Delta-Gamma Hedging

      An options hedging strategy that combines a delta hedge and a ...
    1. Why has the market for high yield bonds grown so much?

      Discover information on the high-yield bond market and learn the reasons why this investment market has grown so rapidly ...
    2. What is the difference between derivatives and options?

      Learn how options are one type of derivative and how equity options derive their value from a stock, and understand other ...
    3. How are rights distributed in a rights offering?

      Learn about stock rights offerings that companies may make, and discover how the rights are distributed among the company's ...
    4. How can electricity be traded as a commodity by an individual investor?

      Learn the characteristics unique to electricity trading as a commodity and how investors can trade electricity futures on ...

    You May Also Like

    Related Tutorials
    1. Bonds & Fixed Income

      Investing For Safety and Income Tutorial

    2. Economics

      American Depositary Receipt Basics

    3. Bonds & Fixed Income

      Certificates Of Deposit

    4. Options & Futures

      Binary Options Tutorial

    5. Mutual Funds & ETFs

      Top ETFs And What They Track: A Tutorial

    Trading Center
    ×

    You are using adblocking software

    Want access to all of Investopedia? Add us to your “whitelist”
    so you'll never miss a feature!