Common stock refers to the equity units of a corporation.
Each stock is called a share. When a company creates its main formation document, known as the articles of incorporation, it states within the articles the number of authorized stock shares. Authorized shares are the maximum number of shares which the company can legally issue.
Companies will issue less shares than authorized, which allows the company to issue additional shares at a later date. The number of shares issued may differ from the number of shares outstanding as a result of the company buying back stock.
Common stockholders are entitled to vote on corporate matters, elect a board of directors to represent their interests, and are entitled to a share of the company profits.
Corporations may decide to “go public” and list their shares on a stock exchange. When a company’s shares are listed, investors purchase or sell their shares through a broker-dealer. Shares of public companies are considered “widely held.” In contrast, private companies with few shareholders are “closely held.”
Common stock is the most junior security in a firm’s capital structure. This means that common shareholders may only receive distributions (dividends) after payments are made to creditors and preferred equity holders. In addition, common stockholders will receive proceeds from a liquidation only after creditors and preferred equity holders are paid.
Corporations may issue multiple classes of common stock. The different classes of common stock have different voting rights, allowing a small group of insiders to have outsized operating influence on the company. This arrangement is common among founder-led companies.
New to investing? Start with our guide to fundamental investing.