Common Stock

When you a buy a share of common stock, you are buying a share in a company with the expectation that the company does well and increases in value.  You may hear the the term Dow Jones, S&P, and Nasdaq; these are all indices which attempt to provide a broad overview of the entire stock market.  These companies create their own basket of stocks to follow the market. 

History has shown us that over the long haul, stocks provide the best rate of return.  Over a short period of time, you may be able to find other asset classes that can outperform stocks.  There are a few different techniques in analyzing stocks.  The most popular technique is referred to as fundamental analysis.  Fundamental analysis looks that the companies earnings, revenues, assets, and other tangible company metrics which give insight into the future of a company.  Another technique used by many shorter term traders is known as technical analysis.  This method of analyzing stocks looks at the price of a stock and attempts to uncover trends through price action which gives insight into human psychology.  The theory with technical analysis is that certain pattern attempt to repeat themselves over and over again.  Technical analysts attempt to uncover these patterns and profit off of them. 

Finally, the random walk theory is discussed as the third technique for analysis.  Random walk believes that the market is ultimate gauge for determining the appropriate price of a stock.  Any market analysis is irrelevant according to this technique.  They believe that no one can predict the future price of the stock; and hence, you will see monkeys throwing darts at a board to pick stocks.  They believe it is random in its nature.

Common stock represents an ownership interest in a corporation.  Rather than purchasing bonds, of which most have a fixed rate of return, investors look to purchase an equity stake for the possibility of stock price appreciation.  While common shares have the greatest potential for capital appreciation, they also carry the most amount of risk, as we will discuss below. 

Common stock can be bought and sold through the major stock exchanges such as the New York Stock Exchange, Nasdaq, and AMEX.  

Common Stock & Voting Privileges

An individuals' ownership interest is equal to the number of shares owned divided by the total number of shares outstanding.  Common stock ownership entitles the owner to voting privileges on company decisions such as the selection of the board of directors and other major event such as a merger or acquisition.

Common Stock Has Limited Liability

Equity ownership in a company also represents a limited liability interest in the company.  The maximum risk that can be taken is merely the amount of money that was paid to acquire the common shares.  No legal action or other claims can be brought up against shareholders.

Additionally, common stock holders are entitled to receive dividends after they are paid to preferred stock holders.  The board of directors will decide how much of the companies profits will be paid out to stock holders.  It is important to note that common stock holders will be the last form of ownership interest that will receive dividends. 

Common Stock & Liquidation

Common stock is the low man on the totem pole.  In the event of liquidation where the company has to sell off its assets and files for bankruptcy, the common stock will be worthless.  Common stock is the last form of ownership in the company to get paid out during a crisis event.  Similarly, during tough times, a company may cut its total dividend payment which trickles down to the common shares last.