Introduction to Common Stock

Common stock represents an ownership stake in a corporation. Corporations issue common stock to raise capital for the business.

Common stock is the most basic form of stock and is typically what people reference when they talk about simply "stock." When you buy common stock, you purchase a piece of the company and become a shareholder.

Holders of common stock, called shareholders, own a portion of the company and have voting rights on corporate issues such as members on the board of directors or takeover bids.

Because of the voting rights of common stock, shareholders essentially control the business. Common stockholders may also receive dividends from the company.

Common stock is different than preferred stock. Preferred stock is a type of stock that has certain privileges over common stock but does not carry voting rights. Like common stock, preferred shares represent an ownership stake in a corporation.

One key difference between the two types of stock is that preferred shareholders have priority over common shareholders when it comes to dividends and assets in the event of liquidation.

Shares of common stock are issued in the primary market through an initial public offering (IPO) and then trade in the secondary market, typically on a stock exchange.

Common stock is bought and sold on exchanges such as the NYSE or the NASDAQ, and these exchanges provide real-time pricing on the value of a company. Common stock is generally a liquid investment because stockholders can liquidate their shares readily at market prices.

Common stock is the most widely held investment for retirement savings. Many people invest in common stock through retirement accounts such as 401(k)s and IRAs. Common stock is a popular investment for those looking to build long-term wealth.

Ticker symbols

Ticker symbols are the letter combinations assigned to a company’s security for trading. Ticker symbols allow for easy identification of the corporation being traded and are often related to the company’s name.

Ticker symbols are typically three to five letters long. NYSE and AMEX ticker symbols are up to four characters long, while NASDAQ-listed companies have four or five character ticker symbols.

For example, the ticker symbol for Coca-Cola is KO and Microsoft is MSFT. Tesla’s ticker symbol is TSLA, while Disney’s ticker symbol is DIS.

Ticker symbols may be clever descriptors of the company’s business, such as Harley-Davidson’s ticker symbol HOG.

Ticker symbols are assigned by exchanges such as the New York Stock Exchange (NYSE) or Nasdaq. When a company first goes public, it must submit an application to the exchange on which it wishes to list. Part of this application includes the proposed ticker symbol for the company’s stock. The exchange then approves or denies the request.

If more than one company has the same name, they may be given different ticker symbols by the exchange to avoid confusion.

For example, two companies called Discovery Communications are listed on the NASDAQ. One company is ticker symbol DISCA while the other is ticker symbol DISCK.

When a company is bought or merged with another company, the ticker symbol may change.

For example, when AT&T acquired DirecTV in 2015, AT&T’s stock continued to trade under the ticker symbol T while DirecTV’s stock was delisted and stopped trading.

Some companies have multiple ticker symbols for different classes of their common stock.

For example, Alphabet Inc. (GOOGL) has two ticker symbols for its Class A and Class C shares of common stock. Class A shares trade under the ticker symbol GOOGL, while Class C shares trade under the ticker symbol GOOG.

FAQs

Is common stock an asset or a liability?

Common stock is neither an asset nor a liability for the company. Common stock is equity, which provides shareholders with an ownership stake in a company. Common stock owned by an investor is considered an asset of the investor.

How to calculate common stock?

A company’s market capitalization is determined by multiplying the stock price by the number of shares outstanding. The stock price is the current value, per share, of a company as decided by market participants. To calculate the number of outstanding shares, divide the market capitalization by the current stock price.

What is the difference between preferred and common stocks?

Preferred stock is a form of equity ownership in a corporation with a higher priority in dividend payments than common stock but does not typically have voting rights. Preferred stock is viewed as somewhat of a common-stock-and-debt hybrid because preferred stock has an income-oriented cash flow stream through dividends but does not have the same corporate rights as common shareholders.

In a corporate liquidation, preferred stockholders are junior to debt holders but senior to common shareholders. Dividend payments for preferred stock may be payable in arrears, meaning any missed dividend payments for preferred stockholders must be paid before any dividends are paid to common stockholders. While preferred stock does have appreciation (and depreciation) potential, many preferred stock buyers do so to generate income.

Common stock represents an ownership stake in a corporation. Corporations issue common stock to raise capital for the business. Holders of common stock, called shareholders, own a portion of the company and have voting rights on corporate issues. Because of the voting rights of common stock, shareholders essentially control the business. Common stockholders may also receive dividends from the company. Shares of common stock are issued in the primary market through an initial public offering (IPO) and then trade in the secondary market, typically on a stock exchange.