A1.5.1. Common Stock
Common stock, also referred to as common shares, common equity, or ordinary shares, is what the average person thinks of simply as “stock.” This stock is called “common” or “ordinary” to distinguish it from preferred stock, but it also is by far the most commonly held and traded type of equity security.
Common stock is a popular investment because it directly represents ownership in a company, and thus allows investors the opportunity to profit from the company’s growth and profitability. Stated simply, when a company is successful, the price of its common stock tends to rise. It is true that other factors also affect a company’s stock prices, including broad market conditions and perceived prospects for a company’s growth (as opposed to its actual growth). Still, the ownership of common stock remains the most straightforward vehicle for participating in—or stated more starkly, betting on—the rise of a company’s fortunes.
Of course, this ownership aspect of common stock also presents substantial risks to investors. If a company stumbles, its stock price usually declines. If the company goes out of business, holders of common stock are likely to lose all or most of their investment: in a bankruptcy proceeding, common shareholders have the lowest priority.
When a company issues stock, it assigns each share a par value, sometimes called a face value, which is the nominal or book value used purely for accounting purposes. A par value of $1 per share is typical. The par value of a stoc