What is Common Stock?

Common stock is the most prevalent form of ownership of a public company, which is a corporation that is owned by public investors. Anyone who gives money to the company in exchange for partial ownership of that company is a public investor. By contrast, a private company is owned by a small group of individuals who usually have a direct involvement in the company’s operations. Ownership of a public corporation is apportioned into a set number of shares, each of which represents a fraction of ownership in the company. Stockholders, or shareholders, are those individuals who own stock in a particular company.

There are several basic characteristics of common stock that distinguish it from other forms of stock. For one, owners of common stock have the right to vote directly on matters related to the functioning of the company. Owners of preferred stock, which is a stock that guarantees the shareholder the first right to receive a dividend (a payment, usually distributed four times a year, that companies pay to shareholders, generally based on the overall performance of the company during that quarter), do not share the right to vote on company matters. Preferred stock is the second most typical form of ownership in a publicly owned company.

Capital stock generally refers to the total number of stock shares that a company is authorized to sell to investors. A company’s capital stock is related to the amount of money the company is able to invest in its own growth. In other words if a company is confident in its potential for increased profitability (its capacity for earning more money), it will increase the number of shares it makes available to the public, thereby increasing its capital stock. Companies generally use additional money raised by increases in capital stock to invest in projects or equipment designed to expand their business. The term capital stock is also used more broadly to refer to a company’s full offering of both common and preferred stock.

Blue-chip stocks are the stocks of companies that have a reputation for continued high performance and profitability over a considerable period of time. Blue-chip stocks are considered a safe investment because they tend to pay consistent dividends, regardless of the overall state of the general economy. Because blue-chip companies tend to enjoy large earnings, blue-chip stocks tend to have a high price and to pay a more modest (but reliable) dividend. The name blue-chip is derived from the blue chips (generally those having the highest value) used in poker games. Blue-chip stocks are sometimes referred to as bellwether stocks.

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