What is common stock?
A share of common stock represents partial ownership in a corporation.
When people get together to form a company one of the issues to be decided is who owns how much of the company. For example, let’s say three people form a company. Person “A” puts in $500, “B” puts in $300 and “C” puts in $200. If the company is formed as a corporation, “A” would get half the shares, “B” would get 30% and “C” would get 20%. The number of total shares that are issued is largely arbitrary. The owners can decide that the corporation will issue a million shares. If that’s the case, “A” would get 500,000 shares, “B” 300,000 and “C” 200,000.
Generally in small companies the people who put up the money receive shares in the company and then form a “Board of Directors.” The board makes the policy decisions for the corporation which the company’s management is directed to carry out.
Each shareholder gets one vote for every share of stock he owns when voting on issues coming before the board.
As the company gets larger it may decide to “go public.” That means that it will allow the general public to buy an ownership stake in the corporation. To “go public” requires the company to jump through many regulatory hoops to be legally allowed to sell some of its shares in what is called an “initial public offering.” Once the decision is made, the company also has to decide where its shares should be traded. The most common markets are the New York Stock Exchange (NYSE) or the NASDAQ (the “over the counter market”). While the NYSE is the most prestigious the NASDAQ is where some of the biggest companies – like Microsoft and Apple – are traded. It is easier to get listed on the NASDAQ so most companies “go public” there.
Once a company is “publicly traded” the owners of these shares have the same voting rights as the founders, one vote for every share they own.
Owners of common stock reap most of the benefits if a company is successful and have the most to lose if a company fails. But that is an issue for another day.