Common stock is the basic class of ownership shares in a company. Holders of common stock own the business in proportion to the number of shares they hold, usually elect the board of directors and vote on major corporate decisions, and are entitled to whatever is left of the company's profits and assets once everyone with a prior claim has been paid. In the UK and much of the Commonwealth the same instrument is called ordinary shares.
Common stock is the most widely traded form of stock; when news reports say a company's shares rose or fell, they almost always mean its common shares. It sits at the bottom of the company's capital structure, below bondholders and other lenders and below holders of preferred stock. That position makes it the riskiest claim on a company, and also the one with no upper limit on what it can be worth.
Common stock in plain terms
Think of a company as a house bought with a mortgage. The bank that lent the money must be repaid first, whatever happens. Whatever the house is worth after the mortgage is cleared belongs to the owner. If the house rises in value, the owner keeps all of the gain; if it falls below the mortgage, the owner's stake can shrink to nothing.
Common shareholders are the owners in that picture. Lenders get a fixed amount, and preferred shareholders get a set dividend before anyone else. Common shareholders get the rest: nothing if the business struggles, and a great deal if it thrives. In exchange for standing last in line, they usually get the say in how the company is run, by voting for the people who oversee it.
The exact rights depend on the company's home law and its own constitutional documents, but common stock typically carries the following:
- Voting. Common shareholders elect directors and vote on matters such as mergers, changes to the articles and, in many markets, executive pay. Most votes are cast through proxy voting rather than in person.
- Dividends. Holders share in any dividend the board declares, after preferred dividends. The board decides whether to pay at all; there is no legal right to a dividend.
- A residual claim. In a liquidation, common shareholders receive what remains after creditors and preferred holders are paid in full, which is often nothing.
- Information. Public companies must publish financial statements, including an annual report, so that owners can judge how the business is doing.
- Transfer. Shares can usually be sold freely; in a listed company they trade on an exchange at the market price.
The full set of rights, and how they are exercised, is covered under Shareholder (Stockholder).
Classes of common stock
Most companies follow the rule of one share, one vote, but some issue more than one class of common stock with different voting power. A dual-class structure lets founders keep control while selling most of the economic ownership to the public. Alphabet, for example, has Class A shares with one vote each, Class B shares with ten votes each that are not listed and are held mainly by its founders and insiders, and Class C shares with no vote. Meta Platforms also uses a dual-class structure.
Supporters say these structures let founders pursue long-term plans without pressure from short-term investors. Critics say they weaken governance by separating control from ownership. Index providers have taken different views: in 2017 S&P Dow Jones Indices stopped admitting new companies with multiple share classes to the S&P 500, then lifted that restriction in April 2023.
Common stock compared with preferred stock
| Feature | Common stock | Preferred stock |
|---|---|---|
| Voting | Usually one vote per share | Usually none, except in special cases |
| Dividend | Variable, paid only after preferred | Usually fixed and paid first |
| Claim in liquidation | Last | Ahead of common, behind creditors |
| Upside | Unlimited | Usually capped near its stated value |
| Price behaviour | Moves with company results | Moves more like a bond, with interest rates |
Returns, risks and valuation
Common stock earns its return through dividends and price changes, together known as total return. Because common holders absorb the first losses, the shares tend to swing more than the company's bonds, a feature measured as volatility. Investors weigh the price against measures such as earnings per share (EPS) and the price-to-earnings ratio, and the total value of all shares is the company's market capitalization.
Issuing new common shares dilutes existing owners, which is why shareholders often watch employee share plans, rights issues and secondary offerings closely. Companies can also reduce their share count by buying back stock. Common shares can be bought directly through a broker or held indirectly through an equity fund, which pools many companies' stock. Size and style labels such as large-cap, small-cap, growth and value all describe common stock.