What Is Common Stock?
Common stock is the basic ownership security of a corporation and what most people mean when they say they own shares of a company. Common shareholders have voting rights, typically one vote per share, and participate fully in the company's growth through price appreciation and any dividends the board declares.
The trade-off is priority. In a liquidation, common shareholders are paid last, after lenders, bondholders, and preferred shareholders. In exchange for that residual claim, they capture unlimited upside if the business succeeds.
Common vs. Preferred Stock
Preferred stock sits above common stock in the capital structure and usually pays a fixed dividend that must be paid before any common dividend. Common stock generally carries voting power while preferred stock often does not, and common dividends are discretionary rather than fixed.
Because common equity absorbs losses first and gains most from growth, it behaves more like a bet on the business itself, while preferred stock behaves more like a hybrid between a stock and a bond.
Example
Suppose a startup is sold for $100 million. It owes $40 million to lenders and $20 million to preferred shareholders. The remaining $40 million belongs to common shareholders. If there are 10 million common shares outstanding, each share receives $4.
Had the company sold for $200 million instead, the debt and preferred claims would stay fixed at $60 million, and common shareholders would split $140 million, or $14 per share, illustrating how common equity captures the upside.
Why It Matters
Common stock is the security valued in most equity analysis: metrics like earnings per share, the price-to-earnings ratio, and market capitalization are all built on common shares. Understanding where common equity sits in the capital structure is also essential for interviews in investment banking and equity research, where you are constantly asked who gets paid first and who owns the upside.
