Key Takeaways

While it comes with the highest potential rewards, common stock can be extremely volatile.
Holders of common stock are last in line for dividend payouts and asset distribution if liquidation occurs.
A strong investment portfolio should contain a mix of common stock and more stable securities.
Common stock is an investment in a company that grants a share of ownership.

Common stock or shares are the most popular mechanisms for a partial ownership interest in a business. Here we take a detailed look at common stock and when other forms of stock or shares may be more beneficial.

What is Common Stock?

There are many different ways to invest in a company. Three main examples are bonds, preferred stock, and common stock. Each comes with its advantages and disadvantages, or potential risks. As you might guess from the name, the most common of these is common stock. Introduced by the Dutch East India Company in 1602, common stock is now traded on exchanges in every major financial center. This includes two in New York – the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

Primarily, common stock is a way of buying shares in the ownership of a company (See Investopedia). It grants voting rights within the business alongside opportunities to earn dividends or profit from a growth in the market capitalization or value of the company. There are several key differences between common stock and preferred stock, which should be understood before choosing which to invest in.

Of course, apportioning common stock is also an important element of incorporating a company: Who should get common shares, and who, if anyone, should get preferred shares?

1. Voting rights

Owners of common stock receive voting rights for decisions on corporate policy and the election of board members. Preferred stockholders do not.

2. Dividends

Common stockholders are last in the queue for dividends after bonds have been paid out and all preferred stockholders have received theirs. Dividends are not guaranteed for common stock.

3. Liquidation

In the event of a company collapsing, any claims by common stockholders are only paid after those due to preferred stockholders are fulfilled, should any assets remain (See Corporate Finance Institute).

4. Convertibility/collectability

Once you have common stock, it cannot be converted into other types of securities or collected by the company except in particular circumstances. It can only be traded privately or on open markets.

5. Volatility

The value of common stock is intrinsically tied to company performance and market conditions and is significantly more volatile than preferred stock or bonds.

6. Market participation

If the company increases in value, so does the common stock. The same is not always true for preferred stock or other securities.

Feature	Common Stock	Preferred Stock
Ownership & Rights	Ownership with voting rights (e.g., board votes)	Ownership but typically no voting rights
Dividend Payment	Variable, not guaranteed; depends on profitability and board decisions	Usually fixed or predetermined; paid before any common-share dividends
Dividend Priority	Last in line — only after preferred shares have been paid	First priority ahead of common when dividends are distributed
Potential for Capital Appreciation	High — share price can rise substantially if the company grows	Limited compared to common stock; behaves more like a bond or fixed-income instrument
Volatility / Risk	Higher — sensitive to company performance and market sentiment	Lower — more stable and predictable returns but less upside
Liquidation / Assets Claim Priority	Lowest — after creditors, debt holders, and preferred shareholders	Higher — preferred shareholders receive claim before common shareholders

Advantages of Common Stock

Owning common stock in a company comes with two significant advantages over other types of investment. The first is that it represents ownership in the company and comes with voting rights. This allows stockholders to have some say in how the company is managed and what decisions are best for protecting their interests. It also grants them appraisal rights when decisions go against the stockholder’s vote, thus helping to ensure a fair price is received for shares in any circumstances.

The other advantage of common stock is its potential for high returns. As the stock price is closely linked to company value, prudently purchased shares have almost unlimited potential to grow. This is the case whether the shares are “growth stock” from companies likely to outperform the overall market or “value stock” that has been undervalued to create the best chance of higher overall yields. In addition to these advantages, common stock is the simplest to trade on the open market, theoretically giving its holders the maximum control over their fate.

Risks and Challenges of Common Stock

When making investments, a higher potential for reward often comes with higher risk. That is certainly the case with common stock. While it might have the greatest potential for capital appreciation of all the securities, being so closely tied to a company’s market value also gives it the highest potential to lose value. Unlike more stable securities such as bonds and preferred stock, common stock is highly volatile and must be monitored closely to maximize potential and minimize risk. Gambling on knowing when to trade common stock is a key factor in making the most from it.

The other main challenge of common stock is the variability of its dividends. While the regular payouts from bonds and preferred stock are much more set and more likely to be granted every time dividends are issued, common stock is last in the queue with no guaranteed dividend value. If investing in common stock, projected profits should be based primarily on the potential for its value to increase rather than the potential for dividends.

Investing in Common Stock

The best practice when investing in any stock is to thoroughly research the company and the nuances of the stock before purchasing. Because of its volatility, this is even more crucial for common stock than other forms of securities. Knowing as much as possible about the company, the market, and any factors that may affect the stock’s value in the near, medium, and long term future is essential if you are to realize the maximum potential and minimize the possible risks of a common stock investment. Case studies and guides can help with this, but there is no substitute for working with an expert or agent who can help you manage your stock choices. This may come with fees or commissions, but a trusted financial advisor can help ensure common stock purchases work for you rather than against you.

Common stock represents ownership shares in a company, with voting and dividend rights that vary depending on stock class and company bylaws. MSA Asia’s China corporate services guide equity structure and governance. Talk to the experts about equity planning.