• August 2019
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Common Stock

Common stock is a security that represents ownership in a corporation and entitles holders to elect directors and vote on significant corporate changes or policy.

Common stockholders are low on the totem pole in terms of who a company finds most important. In the event of a liquidation or bankruptcy of a company, common stockholders have the lowest level right to corporate assets and may be paid only after preferred shareholders, bondholders, and creditors have been paid in full.

As you can imagine, this means that common stock is riskier than debt or preferred shares. However, common shares usually outperform bonds and preferred shares in the end, making it a bit of a tortoise and hare kind of investment situation. Many companies have all three types of securities.

Usually when it comes to startups, employees and founders get common stock while investors get preferred stock. This is in order to make investing in the company more attractive. But really the main difference is what happens when and if the company is sold. In that scenario, common stockholders can be SOL and get little or no return on their investment after everything else is divided up.

Before a company can start issuing any stock at all, there must be an initial public offering or an IPO. This is how a company gets the money it needs to expand.

A company seeking to have an IPO works with an investment firm, which determines the type of stock and what to sell it for per share. When the IPO phase is completed, the general public can then purchase the stock.

 

EXAMPLE:

I’m just a common stock. My life is so basic!