What is Stock in Accounting? (Part 1)

Common stock is a form of corporate equity ownership, a type of security. The word “common stock” widely being used in the United Stated, which the rest parts of world, is using the word “voting share” or “ordinary share”.

Other than common stock, there is another type of stock, which is called as preferred stock. If both types of stock exist, common stock holders cannot be paid dividends until all preferred stock dividends (including payments in arrears) are paid in full.

In the event of bankruptcy, common stock investors receive any remaining funds after bondholders, creditors (including employees), and preferred stock holders are paid. As such, common stock investors often receive nothing after a bankruptcy.

On the other hand, common shares on average perform better than preferred shares or bonds over time. Common stock usually carries with it the right to vote on certain matters, such as electing the board of directors. However, a company can have both a "voting" and "non-voting" class of common stock.

Holders of common stock are able to influence the corporation through votes on establishing corporate objectives and policy, stock splits, and electing the company's board of directors. Some holders of common stock also receive preemptive rights, which enable them to retain their proportional ownership in a company should it issue another stock offering. There is no fixed dividend paid out to common stock holders and so their returns are uncertain, contingent on earnings, company reinvestment and efficiency of the market to value and sell stock.

Additional benefits from common stock include earning dividends and capital appreciation.