20 Investments: Common Stock
  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. Common Stock Equivalent

      Securities such as stock options, warrants, preferred bonds, ...
    2. Stock

      A type of security that signifies ownership in a corporation ...
    3. Common Stock Fund

      A mutual fund that invests in the common stock of numerous publicly ...
    4. Common Stock

      A security that represents ownership in a corporation. Holders ...
    5. Preferred Stock

      A class of ownership in a corporation that has a higher claim ...
    6. Preference Shares

      Company stock with dividends that are paid to shareholders before ...
    RELATED FAQS
    1. What is the difference between the equity market and the stock market?

      Discover the basic information about the equity, or stock, market and the two primary classifications of equities that are ... Read Answer >>
    2. What are the types of share capital?

      Understand the characteristics of common stock and preferred stock, the two ways by which companies obtain share capital ... Read Answer >>
    3. Can anyone own common stock in a company?

      Understand who can purchase common stock as well as the key characteristics that differentiate common stock from preferred ... Read Answer >>
    4. Can preferred stocks be traded like common stocks? Are their prices the same?

      First, let's look at the differences and similarities between common stocks and preferred stocks. Both represent a piece ... Read Answer >>
    5. What is common stock and preferred stock?

      Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ... Read Answer >>
    6. What is the difference between Class A shares and other common shares of company's ...

      Discover how a company can break down its common stock into multiple classes and how these classes differ from one another ... Read Answer >>
    Hot Definitions
    1. Reverse Mortgage

      A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
    2. Labor Market

      The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
    3. Demand Curve

      The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
    4. Goldilocks Economy

      An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
    5. White Squire

      Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
    6. MACD Technical Indicator

      Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
    Trading Center