What a share of common stock gives you

Owner of whatever is left

A share of common stock is a slice of ownership. It is not a promise to pay you anything. Everyone the company owes — banks, bondholders, suppliers, preferred stockholders — has a claim that comes first. The common stockholder owns what remains after all of them. That residual position explains every right and every risk that follows.

Because owners carry the last-place risk, the law gives them control. Common stockholders elect the board of directors and vote on matters that change the company itself, such as a merger or a new class of shares. Under statutory voting each share casts one vote per seat; under cumulative voting a holder may pile all votes on one candidate, which helps small holders win a seat.

Street-name ownership changes the route of the vote, not the ownership right. The broker-dealer is the record holder and forwards the issuer’s proxy materials and voting instructions to the beneficial owner, who directs the vote. The broker may vote uninstructed shares only where the applicable rules permit; it cannot choose the outcome of a contested merger simply because its name is on the register.

Dividends are different from interest. A bondholder is owed the coupon by contract. A common stockholder receives a dividend only when the board declares one, and the board may stop at any time. Where the corporate charter grants it, holders also have a pre-emptive right to buy new shares before outsiders, so their ownership fraction is not diluted.

Limited liability caps the downside. The most a stockholder can lose is the price paid for the shares; creditors cannot reach personal assets. That cap is what makes a public market possible — strangers can buy a slice of a business without answering for its debts. The trade-off is the queue: if the company fails, common is paid last, often nothing.

Shares are also sorted by what an investor is buying them for, and those labels turn up in recommendation questions. A growth stock has earnings growing faster than the market average and rarely pays a dividend, so the return has to come from the price. An income stock pays dividends consistently, which is why it suits someone who needs the cash rather than the appreciation. A value stock carries a low price-to-earnings ratio, meaning it is cheap relative to what it earns, often because it has fallen out of favor. These describe the investment case, not a different legal right: each one is still common stock.

Exam terms

Stock

A share of ownership in a company, also called equity. Unlike a bond, it is not a promise to repay.

Residual claim

The owner’s claim on whatever remains after every creditor and preferred holder is paid.

Statutory voting

One vote per share for each board seat; votes cannot be concentrated on one candidate.

Cumulative voting

Votes for all seats may be pooled onto a single candidate; favors minority holders.

Declared dividend

A payment to stockholders that exists only once the board votes to make it.

Limited liability

A stockholder can lose the investment but is not liable for the company’s debts.

Liquidation priority

The fixed order in which claims are paid when a company is wound up.

Street name

The intermediary's name is on the issuer's books while the customer remains the beneficial owner.

Proxy

The voting material and instruction process through which a beneficial owner directs a vote.

Worked example

Verity holds 200 shares of a company that is wound up. Its assets sell for $9 million. Secured lenders are owed $4 million, unsecured creditors $3 million, and the preferred stock carries a $1.5 million liquidation preference. There are 1,000,000 common shares.

1. Secured lenders take $4 million first, leaving $5 million.
2. Unsecured creditors take $3 million, leaving $2 million.
3. Preferred holders take their $1.5 million preference, leaving $0.5 million for common.
4. $0.5 million across 1,000,000 shares is $0.50 per share, so Verity receives $100 for her 200 shares.
5. Had the assets raised only $8.5 million, common would have received nothing — and Verity would owe nothing, because her liability is limited to what she paid.

Check yourself

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Related practice

• Common stock rights and liquidation orderPractice this