Common Stock: It’s what your friends are REALLY buying

What is common stock? What does it mean when someone says that they bought common stock or own common stock? Before I started learning about finance and investing I had no idea. You may very well be in the same boat. No worries. Thisis not an extremely difficult concept but unless you’ve been taught what it is you probably don’t know. So let me explain. 🙂

(1) What is Common Stock?

If you ever hear someone say that they own shares in a company, chances are that they are referring to common stock without even knowing it. 

Common stock is a small sliver (share) of ownership in a company. 

Common stock is called common because it is, well, common. There are other types also (preferred, treasury, outstanding, etc.) but they are far less common. See the theme here?

 When someone says that they are going to buy a share of Amazon, they are nearly always referring to buying a share of common stock. 

Just think of a share of common stock as a really small piece of ownership of the company. In fact, if you own one share of Amazon in November of 2021, you own 1/513,000,000th of the company! CONGRATULATIONS! 

Also, when you purchase mutual funds (most of the time) they are going to have a lot of different common stocks in them. The same would be true with index funds.

(2) Benefits of Owning Common Stock

There are three main benefits of owning common stock:

1. Voting Rights: When you are own shares of a company you will have a say in certain operations that the business has. You can vote on things like who is on the board of directors, large business expansions, etc. You won’t get to vote on small things like what color they paint the wall in the home office or something like that but you will get a small say in the large issues if you choose to vote.
2. Gains: When you own this you will also have the opportunity to see gains in the price. This one is the reason that most people buy it in the first place (or investments at all). If you buy a share at $10 you hope that one day it will be worth $20. In addition to gains in the stock price you may also get dividends for owning it. 
3. Limited Liability: This is a benefit that most people don’t think of when owning stock but it is really important. When you own a share you are not liable for any wrongdoing of that business. If the company gets charged, sued, or otherwise in legal trouble you are not liable for any damages. The board members, executives, individual employees might be but YOU will not be. 

(3) Disadvantages of Owning Common Stock

There are three main disadvantages of owning common stock:

1. Lack of Control: If you own a share of common stock and you don’t like how the company is conducting business, you can’t do anything about it. Just because you own a share of Walmart doesn’t mean that you have the right to drive to Bentonville and tell the executives to sell the type of paper towel that you like. It doesn’t work like that. If you don’t like how the company is operating you can either (1) vote for new leadership or (2) sell your share(s).
2. Risk of Loss: Yes, all investments come with some amount of risk of losing your money, but the risk is generally considered the greatest with common stock. You may not lose all of your money because the company that you were invested in went bankrupt. But the stock price could go down and you could lose a portion of what you originally invested.
3. Last to get Paid: In the event of bankruptcy of a company there is a line of people waiting to get paid with whatever money there may be left. If you own common stock, you are at the very end of that line. There is a very slim possibility that you will get anything back at all. This is unlikely, but it does happen from time to time.

Final Thoughts

Like I said before, common stock is not a horribly complicated topic.

Just remember that if someone tells you that they bought some stock in (fill in the blank) company, they are talking about common stock unless they say otherwise. 

You might be asking yourself, “Should I invest in this.” The answer is, maybe. It depends on your situation. 

What I can tell you is that not all common stocks are created equal. Some are really really safe and some are really really risky. The more risk that you have the higher chances that the stock price will go to the Moon. So it will just depend on your situation. 

I hope that I have given you some useful knowledge to help you on your own personal finance and investing journey. 

As always, please share this article with a friend. It really helps me out a ton!

Until next time!