What Does Common Stock Give You the Right to Do?

Common stock represents a fundamental type of ownership in a corporation. When an individual purchases common stock, they acquire a fractional interest in the company, making them a shareholder. Owning common stock establishes a connection between the investor and the company’s financial success and operational direction.

Shareholder Voting

A core right associated with common stock ownership is the ability to vote on significant company matters. Common shareholders typically cast votes on the election of the board of directors, who are responsible for overseeing the company’s management. Shareholders also vote on major corporate actions, such as mergers and acquisitions, changes to the company’s charter, and the issuance of new securities.

The principle of “one share, one vote” generally applies, meaning that a shareholder’s voting power is proportional to the number of common shares they own. While shareholders can attend annual meetings to vote in person, the most common method for exercising this right is through proxy voting.

Proxy voting allows shareholders to authorize another individual or firm to cast votes on their behalf, often via mail, phone, or online. Companies provide proxy materials, including a proxy statement outlining the issues to be voted upon, to facilitate this process. This mechanism ensures that shareholders can participate in corporate decision-making even if they cannot attend meetings, thereby maintaining their influence over the company’s strategic direction and oversight.

Receiving Company Distributions

Common shareholders are entitled to receive distributions from the company’s profits, primarily in the form of dividends. A dividend represents a portion of a company’s earnings that is paid out to its shareholders. These distributions can be made as cash payments or as additional shares of stock.

Dividend payments are not guaranteed and are typically declared at the discretion of the company’s board of directors. Unlike some other types of securities, common stock dividends are not fixed and can fluctuate or even be suspended based on the company’s financial performance and strategic decisions.

Many companies offer Dividend Reinvestment Plans (DRIPs), which allow shareholders to automatically use their cash dividends to purchase additional shares of the company’s stock. This provides a convenient way for investors to increase their ownership stake without incurring additional brokerage fees. Participation in a DRIP can facilitate compounding returns over time, as the reinvested dividends acquire more shares, which in turn can earn more dividends.

Ownership and Asset Claims

Common stock represents a residual ownership claim on a company’s assets and earnings. In the event of a company’s liquidation or bankruptcy, common stockholders are considered “residual claimants”.

Their claim is junior to that of all creditors, such as bondholders, and also to preferred shareholders. Consequently, common shareholders are the last in line to receive any remaining assets once all other financial obligations have been paid. This position carries a higher level of risk but also offers the potential for greater returns if the company performs well and grows its value.

Another inherent right of common shareholders is the ability to freely transfer or sell their shares in the open market. This provides liquidity to their investment, allowing them to convert their ownership stake into cash. The value of common stock also reflects a share of the company’s future growth potential, as successful business operations can lead to an appreciation in share price over time.