Common stock is a type of tradeable asset, or security, that equates to ownership in a company. If you own common stock in a company, you have the right to vote on things like corporate policies and board of director decisions. Common stock is just one type of stock traded on public exchanges.
In this guide, we’ll go over:
- Common Stock Definition
- Who Uses Common Stocks?
- Preferred Stock vs. Common Stock
- How to Calculate Common Stock
- Related Investing Skills
Common Stock Definition
Common stocks are essentially shares of ownership. These stocks are the types most people invest in on the stock market or public exchange. When you own a common stock, or a share, you may be eligible for dividends — and if the company does well, you may get a part of that profit. Additionally, shareholders can vote on big company decisions. For that reason, common stocks have a lot of value outside of money: if you can help decide who’s running a large company, you have the power to make some real-world changes.
However, some companies may also sell common stock that’s not eligible for voting rights. For example, Google (also known as Alphabet on official documentation) has two types of common stocks available: voting and non-voting. Non-voting common stocks are still valuable, though! Because these are publicly traded assets, there’s still room to turn profits from selling shares if a company does well.
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Who Uses Common Stocks?
Because common stocks are publicly traded, practically anyone can invest in them. Corporate finance professionals, such as investment bankers, may use common stock prices on the exchange as an indicator of a company’s performance. Additionally, one aspect of investment banking is bringing private companies through the initial public offering (IPO) process, making the company public. Once the company is publicly traded, it will likely issue common stocks.
Personal finance advisors and financial advisors often guide their clients through the purchase or sale of a variety of company common stocks. Stockbrokers, too, facilitate the buying and selling of these common stocks.
Ultimately, most positions in the investing industry will likely interact with common stocks one way or another.
>>MORE: Learn if investment banking is a good career path.
Preferred Stock vs. Common Stock
Another type of stock often at play is preferred stocks. A preferred stock does not come with any voting rights but does come with more monetary benefits than common stocks. For example, preferred stock shareholders receive dividends on their investment before any common stock shareholders.
One downside of common stock is that it’s the lowest rung on the payment plan if things go wrong. For example, if a company goes bankrupt, preferred stockholders, creditors, and bondholders must receive their payments first before common stockholders receive any money.
However, common stock tends to offer better returns in the long run. While you have a lot of risk if a company goes bankrupt, common stocks offer high returns on investment if a company does well.
Another key difference between common stock and preferred stock is that preferred stock is affected by interest rates. If interest rates rise, preferred stocks lose their value. On the other hand, the supply and demand of the market determine common stock prices.
>>MORE: Learn if finance is a good career path.
How to Calculate Common Stock
The common stock is the number of shares in a company or the number of pieces of ownership. Every company has a balance sheet, which shows the company’s assets, liabilities, and stockholder equity. To figure out how much of a company’s value is held in stockholder equity, you can subtract the company’s liabilities from its total assets.
Common Stock Formulas
Value of Common Stock
If a company has only issued common stock, rather than also having preferred stock or treasury stock (shares bought back by the company itself), you can calculate common stock value with this formula:
Common Stock = Total Equity – Retained Earnings
Retained earnings are how much the company keeps after it has paid out expenses and dividends.
Outstanding Common Stock Shares
To figure out how many shares of common stock a company has available, use this formula:
Outstanding Common Stock = Number of Issued Shares – Treasury Stocks
Companies can only issue a certain number of shares, but they can issue less than their authorized amount. Companies may also buy back outstanding shares, creating treasury stocks. Calculating the number of outstanding shares is useful in corporate strategy to determine if more stocks can (or should be) issued and if the company should buy back any shares.
Related Investing Skills
Understanding common stocks and why they are important is an essential skill for anyone working in finance or investing. Other crucial skills for investing professions include:
- Completing discounted cash flow (DCF) valuations
- Using Excel
- Calculating the weighted average cost of capital (WACC)
- Understanding debt capital markets
You can learn these skills (and more!) with Forage’s Investment Banking Skills Passport.
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