Common stock

An ownership share in a company that carries a residual claim on its assets and earnings - whatever is left after every creditor and preferred holder has been paid - usually together with a vote on certain corporate matters.

Example

Owning 1,000 of a company's 50 million shares means owning 0.002% of whatever remains after all its obligations are met.

Important

Common stock promises nothing. No dividend is owed, no principal is repaid, and no date is set - the three things a bond has and a share does not.

Related terms

• Residual claim — A right to what is left over after all other claimants have been satisfied. Ordinary shareholders hold a residual claim, which is why they are paid last in a wind-up and why nothing is guaranteed to them.
• Preferred stock — A class of shares ranking ahead of common stock for dividends and in a wind-up, usually paying a fixed or formula-based dividend and usually carrying no vote.
• Shareholder — Someone who owns shares, equity, in a company.
• Equity — Ownership in a company or asset - a claim on whatever is left after debts, and on any growth in value.

Lessons that explain it

• With several preferred classes, each one decides whether to convert — When a company has several classes of preferred shares, exit proceeds are divided in order of seniority, and each class chooses between its preference and converting. Working through exits of different sizes shows how common shareholders are affected. (12 min)
• A cap table is a list of who owns what, and it only ever gets longer — A capitalisation table records every share, option and convertible claim in a company. Ownership percentages depend on whether you count only issued shares or everything that could become shares. (9 min)
• A director appointed by an investor owes duties to the company, not to that investor — Board directors generally owe fiduciary duties to the company and its shareholders as a whole. An investor-appointed director who puts their fund's interests first can breach those duties, which is the central tension in startup governance. (12 min)
• Two shareholders can own the same percentage and receive very different amounts — Common and preferred shares can represent the same ownership percentage, but preferred shares usually come with rights - especially liquidation preferences - that decide who gets paid first when a company is sold. (10 min)
• What a share actually is: last in line, and why that is the point — A share of common stock is a residual claim - everything that is left after every other claimant has been paid. That single fact explains most of what equities do. (9 min)
• Run the waterfall at three exit values, and the preference type becomes obvious — A 1x non-participating preference returns the investment or the investor's share, whichever is higher. A participating preference returns the investment and then a share of the rest. The difference is largest at modest exits. (13 min)

All 578 terms in the Investing glossary