Legal Definitions - common stock

Common stock represents a fundamental type of ownership in a corporation. When you own common stock, you become a shareholder, meaning you own a piece of the company. This ownership comes with specific rights and potential benefits:

• Voting Rights: As a common shareholder, you typically have the right to vote on important company matters, such as electing the members of the board of directors who oversee the company's management. Usually, each share you own grants you one vote, though a company's specific rules might vary.
• Potential for Financial Returns: Common shareholders have a claim on the company's profits and assets. This can come in the form of dividends, which are portions of the company's earnings distributed to shareholders. However, the company's board of directors must decide to declare and pay these dividends; they are not guaranteed.
• Residual Claim on Assets: In the event that a company is sold or goes out of business (liquidated), common shareholders have a claim on any remaining assets. This claim is "residual" because it only applies after all creditors (like banks or suppliers) and owners of other types of stock (like preferred stock) have been paid in full.

Examples of Common Stock in Action:

• Voting on Board Members: Sarah owns 500 shares of "Tech Innovations Inc." common stock. Each year, the company holds an annual meeting where shareholders vote to elect new members to the board of directors. Sarah uses her 500 votes to support candidates she believes will best guide the company's future strategy. This demonstrates her voting rights as a common shareholder, allowing her to influence the company's leadership and direction.

• Receiving Dividends: John invested in "Global Manufacturing Co." common stock several years ago. The company has been profitable, and its board of directors recently announced that it would distribute a dividend of $0.50 per share to all common shareholders. John, as a common shareholder, receives a payment based on the number of shares he owns. This illustrates his potential for financial returns through dividends, which are a distribution of the company's earnings, decided upon by the board.

• Claim in Company Liquidation: "Green Energy Solutions Inc." faced severe financial difficulties and had to declare bankruptcy, leading to the sale of all its assets. After paying off its bank loans, suppliers, and employees, and settling with its preferred shareholders, there was a small amount of money left over. The remaining funds, though modest, would be distributed among the common shareholders of Green Energy Solutions Inc. This exemplifies the residual claim on assets that common shareholders have; they are entitled to what remains only after all other, higher-priority claims have been satisfied.