Definition: Common stock, sometimes called capital stock, is the standard ownership share of a corporation. In other words, it’s a way to divide up the ownership of a company; so one share of common stock represents a percentage ownership share of a corporation. For instance, if a company had 100 shares outstanding, one share would be equal to one percent ownership of the company.
What Does Common Stock Mean?
When a business is incorporated, the corporate charter establishes different classes of stock. The first class created is always common shares. You can think of these like the default shares in a newly incorporated business. If no other classes of stock are created, the company will only have common stock by default. The corporate charter can make additional classes like preferred shares, but this isn’t required.
Common shareholders have certain rights within the organization. They have the right to vote on business matters as well as board members according to their ownership percentage. This means that the one percent owner in our previous example would be able to cast a one percent vote at the corporate meetings.
Common shareholders also have the preemptive right to maintain their ownership percentage. For example, if the company is trying to expand its operations by issuing more stock, the one percent owner has the right to purchase additional stock to maintain his one percent ownership before new investors can purchase it.
One of the many perks of being a common stockholder is the right to receive dividends. This isn’t the right to declare dividends, but it is the right to receive them when they are declared. Dividends are the payment of retained earnings to shareholders. It’s a form of return on their investment in the company. When the board of directors declares dividends common stockholders have the right to receive a percentage of dividends available to common stock equal to their ownership in the company.