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What is common stock?


A stock is a type of security that signifies peace of ownership in a corporation an represents a claim on a part of the corporation's assets and earnings. There two main types of shares: common shares and preferred shares. There are clear distinction between two types of shares, primarily based on voting rights and dividend payments. Common shares are also know as ordinary shares, voting shares or equity shares. First ever common stock was established in 1602 by Dutch East India Company and introduced on the Amsterdam Stock Exchange. 

During initial public offering company offers shares for sale and in that way sells part of the company in order to raise capital. Underwriter helps company to determine type and pricing of offered securities. After IPO company's shares become publicly traded and company can issue new stock. Percentage of shareholders' ownership is determined by the number of shares in his possession, which are some percentage of total number of outstanding shares. Most companies issues common stock and it is the type of stock in which majority of people invest.

What makes common stock different to preferred stock? Common stock usually has voting rights although company can have both voting and non-voting type of common shares. Some can have preemptive rights that enables shareholders to retain percentage of ownership in a company even if company issues new stock. Shareholders with voting rights participate in annual general meeting where they vote on issues like appointments to the company's board of directors and corporate policy. Common stock usually don't have guarantee to dividends unlike preferred stock. Board of directors makes decision about paying the dividends to common stockholders but they only after preferred shareholders are paid in full.

When it comes to times of insolvency like bankruptcy common stockholders are at the bottom of priority. Only after bondholders, preferred stockholders and other creditors are paid common stockholders can receive remaining funds. Common stock is also the most riskier type of stock but with greater risk often comes greater potential for reward so they usually outperform bonds and preferred stock in the long run. Events and announcements can surge common stock price making them more volatile in comparison with preferred stock but also more appealing for growth investors. Our advice for investors is to adjust their portfolio depending on the amount of risk they are able to bear.
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