DEFINITION of Common Stock Fund
A common stock fund is a mutual fund that invests in the common stock of numerous publicly traded companies. Common stock funds provide investment diversification and offer time savings over researching, buying and selling individual stocks.
BREAKING DOWN Common Stock Fund
Common stocks are shares of ownership in a corporation that doesn't confer any special privileges, such as guaranteed dividends or preferred creditor status. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debt holders are paid in full.
Common/equity stock is classified to differentiate it from preferred stock. Each is considered a "class" of stock, with different series of each issued from time to time, such as Series B Preferred Stock. Nevertheless, "Class B Common Stock" is a common label for a super-voting series of common stock.
The first-ever common stock was established in 1602 by the Dutch East India Co. and introduced on the Amsterdam Stock Exchange. In 2016, there were more than 4,000 stocks traded on major exchanges and over 15,000 traded over the counter. Larger U.S.-based stocks are traded on a public exchange such as the New York Stock Exchange or Nasdaq. There are also several international exchanges for foreign stocks, such as the London Stock Exchange and the Japan Stock Exchange.
Investing in Common Stock Funds
Investing in a fund that specializes in common stock can provide cost savings if the fund's loads and management fees are lower than the commissions associated with buying and selling individual stocks. Investing in a common stock fund is also a good way to achieve instant diversification, compared with selecting companies individually.
A common stock fund will always be specialized in some way. It might invest in all the companies in the S&P 500, or it might invest only in small-cap tech stocks or mid-cap dividend-paying value stocks, for example. The fund will usually name itself after its specialization and not call itself a common stock fund, because the term "common stock fund" is so broad.
Also, some funds call themselves common stock funds because they invest primarily in common stock (perhaps 80% of the fund's investments), but they might also invest in other types of securities (perhaps 20% of the fund's investments). Investors should look beyond the fund's name and see what it actually holds when evaluating whether the fund is a good fit for their investment objectives.