Common Stock Explained: Understanding the Core Investment Tool of Company Ownership

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Through the detailed explanation of common stock, you can understand what common stock is. Common stock represents company ownership. After purchasing common stock, you will have voting rights and dividend rights. You can participate in major company decisions. The profits from the company’s growth can also be directly shared by you. Common stock involves both risks and returns, requiring you to analyze scientifically and invest rationally.

Key Points

• Common stock represents company ownership, with shareholders having voting rights and dividend rights, allowing participation in major company decisions.
• Investing in common stock involves both risks and returns, requiring shareholders to scientifically analyze the company’s financial condition and market trends.
• Common stock shareholders have a lower claim priority than preferred stock shareholders during company liquidation, bearing higher financial risks.
• Shareholders have the right to access company financial documents, participate in annual general meetings, and protect their legitimate rights.
• When choosing between common stock and preferred stock, you should consider your investment goals and risk tolerance to make informed decisions.

Common Stock Explained

Definition

You will frequently encounter common stock in the investment market. Common stock represents a portion of company ownership. After purchasing common stock, you become a shareholder of the company. The U.S. Securities and Exchange Commission and other major financial regulators clearly state that common stock shareholders have voting rights, allowing participation in major company decisions. You have the opportunity to receive company dividends, but whether dividends are paid is determined by the board of directors. The explanation of common stock helps you understand that common stock shareholders have a lower priority in claiming residual economic value during company liquidation compared to preferred stock shareholders. You bear greater financial risks but may also achieve higher returns.

• Common stock represents a portion of company ownership
• Shareholders have voting rights
• Shareholders may receive dividends, determined by the board of directors
• During liquidation, common stock shareholders claim after preferred stock shareholders
• Common stock shareholders bear higher risks but also have higher return potential

Characteristics

Through the explanation of common stock, you can understand its main characteristics. Common stock is the most common type of stock issued by companies, representing ownership in the company. After holding common stock, you have the right to vote on important decisions, such as the election of board members and major business decisions. You can also receive a portion of the company’s profits as dividends. Common stock is typically allocated to founders, employees, and early investors. You have equal voting rights, enabling you to influence major company decisions, including electing board members, participating in mergers, and voting on any changes to the company’s articles of association.

• Common stock is the foundational stock category
• Holders have equal voting rights
• Can participate in major company decisions
• Entitled to company profit distributions
• High potential for capital appreciation

When purchasing common stock in the U.S. market, you typically focus on the company’s future growth potential and dividend policies. Common stock prices fluctuate with company performance and market expectations. You need to monitor the company’s financial condition and industry trends to formulate investment strategies scientifically.

Legal Attributes

After holding common stock, you gain a series of legal rights. U.S. law stipulates that common stock shareholders have the right to participate in corporate governance, including voting rights and dividend rights. During company liquidation, you can only claim residual assets after creditors and preferred stock shareholders are compensated. Common stock plays an important role in the company’s capital structure. You can understand the differences in legal attributes between common stock and preferred stock through the table below:

When investing in common stock, you need to understand these legal attributes. The explanation of common stock not only helps you understand the company’s ownership structure but also clarifies the rights and risks of different stock types. You can choose the appropriate stock type based on your risk preferences and investment goals.

Company Ownership

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Shareholder Rights

After holding common stock, you become a shareholder of the company. You gain a series of legally granted rights that ensure you can participate in corporate governance, oversee company operations, and protect your interests. You have the right to access the company’s financial documents to understand its operational status. You can sue directors and executives for misconduct to protect the company’s and your own legitimate rights. You can attend annual general meetings, elect directors, and discuss future company matters. You also have the right to request access to the company’s annual accounts, strategic reports, and directors’ reports. These rights make you not just an investor but also a key participant in corporate governance.

• You have the right to access the company’s financial documents to understand its operational status.
• You can sue directors and executives for misconduct.
• You have voting rights to participate in company decisions.
• You can attend annual general meetings, elect directors, and discuss company matters.
• You have the right to request access to the company’s annual accounts, strategic reports, and directors’ reports.

Through the explanation of common stock, you will find that shareholder rights are a core component of company ownership. By exercising these rights, you can directly influence the company’s direction and governance structure.

Voting Rights

After holding common stock, you gain voting rights. Voting rights are one of the most important rights in corporate governance. You can vote at annual general meetings to elect board members and decide on major company matters. Research shows that the size of voting rights affects your voting behavior, especially when management proposals involve conflicts of interest. Shareholders with greater voting rights are more likely to vote against management proposals, enhancing accountability. Voting rights also protect minority shareholders’ interests, ensuring transparency in corporate governance.

• Voting rights influence your voting behavior, especially when management proposals involve conflicts of interest.
• Shareholders with greater voting rights are more likely to oppose management proposals, enhancing accountability.
• Voting rights help protect minority shareholders’ interests and improve corporate governance transparency.
• The strength of voting rights is closely related to institutional shareholder voting behavior, with strong voting right shareholders more likely to support management proposals.
• Pre-voting negotiations and awareness of voting influence also affect voting outcomes.

By exercising voting rights, you can directly participate in corporate governance and influence the company’s future development. When investing in the U.S. market, voting rights are an important indicator of corporate governance structure.

Dividend Rights

After holding common stock, you are entitled to receive company dividends. Dividend rights are a key manifestation of company ownership. The company distributes profits to shareholders based on its operational performance and board decisions. Large U.S.-listed companies typically adopt various dividend policies. You can understand common dividend policy types through the table below:

When investing in common stock, you need to focus on the company’s dividend policy. A stable dividend policy suits investors seeking long-term stable income. Constant and residual dividend policies are suitable for investors willing to bear some fluctuation risks. You can choose companies to invest in based on your needs and risk preferences.

Operational Mechanisms

Issuance and Fundraising

You want to understand how companies raise funds by issuing common stock. Companies typically choose different issuance methods to meet funding needs. You can refer to the table below to understand three common issuance methods:

Through the explanation of common stock, you will find that issuing common stock requires board approval, compliance with securities laws, and disclosure of company information and risks to potential investors. Companies raise funds through stock issuance for business expansion, entering new markets, or supporting growth.

Market Circulation

After purchasing common stock, you can trade it in the secondary market. The secondary market provides a platform for investors to buy and sell stocks after their initial issuance. Major secondary markets include:

• First Market: Listed stocks traded on exchanges, such as the New York Stock Exchange (NYSE), NASDAQ, and London Stock Exchange (LSE).
• Second Market: Over-the-counter (OTC) trading of unlisted stocks.
• Third Market: OTC trading of listed stocks.
• Fourth Market: Large institutional trades conducted through electronic communication networks (ECNs).

You can freely buy and sell common stock in these markets, benefiting from high liquidity, allowing you to adjust your investment portfolio based on market changes.

Price Fluctuations

You will find that common stock prices often fluctuate. Many factors influence prices, including:

• Supply and demand dynamics: Supply and demand directly affect stock prices.
• Company performance: The company’s financial health and performance reports influence investor confidence.
• Economic conditions: Economic growth or recession impacts market performance.
• Market sentiment: Investor emotions and expectations also cause price fluctuations.

Macroeconomic factors are also important. For example, GDP growth typically boosts investor confidence, driving stock prices up. Inflation and unemployment rate changes also affect market performance. You need to monitor these factors, analyze the market scientifically, and make rational investment decisions.

Differences from Preferred Stock

Rights Differences

When choosing investment tools, you must understand the core rights differences between common stock and preferred stock. Common stock grants you company ownership and voting rights, allowing participation in major company decisions. Preferred stock focuses more on dividend and asset distribution priority. You can quickly compare their main rights through the table below:

Holding common stock allows you to directly influence corporate governance. Preferred stock grants you priority in dividends and liquidation but typically does not allow participation in company decisions.

Risk Comparison

When investing, you must consider risks. Common stock has higher price volatility and greater loss potential. Preferred stock offers more stable dividends and lower price volatility. In the event of company bankruptcy, preferred stock shareholders receive priority in residual asset distribution, facing lower loss risks than common stock shareholders.

• Common stock has high volatility, significant return potential, but also high risks.
• Preferred stock has low volatility, stable dividends, and priority in bankruptcy compensation.

If you seek high returns and are willing to bear risks, common stock is suitable for you. If you prioritize stable income and safety, preferred stock is more appropriate.

Investment Choices

When making investment decisions, you need to consider your goals and risk tolerance. Common factors include:

1. If you seek stable income, preferred stock is more suitable. Preferred stock offers fixed dividends and higher safety.
2. If you pursue capital appreciation and corporate governance participation, common stock is more suitable. Common stock offers higher growth potential and voting rights.
3. You need to assess your risk tolerance. Preferred stock has lower risks, while common stock has higher risks.

You can scientifically choose common or preferred stock based on your investment goals and risk preferences. The U.S. market offers diverse options, helping you achieve asset allocation and long-term growth.

Types and Investment

Types of Common Stock

When investing in common stock in the U.S. market, you will encounter various types. Each type corresponds to different rights and distribution methods. You can refer to the following common classifications:

• Authorized Shares: The maximum number of shares a company is allowed to issue. You cannot directly purchase authorized shares, but they determine the company’s future expansion capacity.
• Issued Shares: Shares actually issued and circulated by the company. The common stock you purchase typically falls under issued shares.
• Outstanding Shares: Issued shares currently held by investors. These shares can be freely traded in the market.

You may also encounter different classes of common stock. For example, Class A shares have 100 votes per share, high dividend rights, and priority in profit distribution; Class B shares have 1 vote per share, moderate dividend rights, and secondary priority in distribution; Class C shares have no voting rights, low dividend rights, and the lowest distribution priority. When choosing, you should focus on differences in voting and dividend rights.

Account Opening Process

To invest in common stock, you first need to open a securities account. The account opening process in the U.S. market is standardized and transparent. You can follow these steps:

1. Provide personal information, including name, Social Security number, address, phone number, email address, date of birth, and government-issued identification.
2. Decide whether to open a cash account or a margin account. A cash account uses only your own funds for trading, while a margin account allows borrowing to expand investments.
3. Determine your investment goals and risk tolerance. You need to clarify whether you seek long-term growth or stable dividends.
4. Choose a cash management plan. Some brokers offer USD cash management services for convenient fund allocation.
5. Select how to receive account statements and confirmations, choosing between email or physical mail.
6. Consider whether to grant the broker decision-making authority in certain situations. Some investors authorize brokers to act on their behalf.

You can complete the account opening process through licensed banks in Hong Kong or mainstream U.S. brokers. The process is secure, compliant, and offers strict information protection.

Trading Methods

After opening an account, you can buy and sell common stock through various trading mechanisms. Major U.S. exchanges like NYSE and NASDAQ support multiple order types. You can refer to the table below:

After submitting an order, the broker enters it into the exchange’s order matching system. The system quickly searches for compatible buy and sell orders and executes the trade upon finding a match. You can flexibly choose order types based on your investment strategy.

Many investors mistakenly believe that investing in common stock requires significant capital. In reality, you can flexibly choose your investment scale based on your funds and risk preferences. Continuous investing is more important than frequently timing the market. Rising stock prices do not always indicate a quality investment; you should focus on the company’s fundamentals and long-term value.

Advantages and Risks

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Investment Value

By investing in common stock, you can achieve long-term capital appreciation. Historical data shows that common stock in developed markets yields an average annual real return of 6% to 7%. This return rate surpasses other major asset classes such as sovereign bonds, corporate bonds, commodities, and real estate. You can understand the long-term performance of different asset classes through the table below:

By holding common stock, you not only have the opportunity to receive dividends but also benefit from capital gains driven by company growth. In the long term, common stock offers wealth growth potential superior to other assets.

Risk Factors

When investing in common stock, you need to be aware of various risks. Common stock prices are highly volatile and influenced by multiple external factors. Key risks include:

• Market risk
• Interest rate risk
• Credit risk
• Inflation risk
• Liquidity risk
• Currency risk
• Political risk
• Sequence of returns risk
• Systematic and unsystematic risks

These risks may lead to fluctuations or even losses in your investment principal. You need to allocate assets reasonably based on your risk tolerance.

Strategy Recommendations

You can reduce the risks of common stock investment through scientific strategies. Common methods include:

• Fixed income: Allocate assets across equities, bonds, and other categories to reduce long-term risks.
• Asset allocation: Set proportions for equities, bonds, and short-term investments based on investment horizon, financial needs, and tolerance for volatility.
• Asset location: Hold high-tax investments in accounts like 401(k) and IRAs to reduce tax burdens.
• Tax-smart withdrawals during retirement: Prioritize withdrawals from taxable accounts to improve overall tax efficiency.
• Cash and cash investments: Maintain value during market downturns, reducing portfolio volatility.
• Treasury bonds: Choose short-term treasury bonds as a low-risk income source.

By combining these strategies, you can better manage the risks of common stock investment and achieve stable long-term asset growth.

Through common stock investment, you can directly participate in company growth. Common stock is crucial in asset allocation and long-term investment. Data shows that asset allocation contributes up to 75% to long-term returns. You can refer to the table below to understand the impact of asset allocation and management methods:

You should comprehensively understand the value and risks of common stock, formulate investment strategies scientifically, and continuously monitor market dynamics.

FAQ

What documents are required to open a common stock account?

You need to prepare identification, proof of address, contact information, and date of birth. Licensed banks in Hong Kong or mainstream U.S. brokers will require you to fill out relevant forms and submit materials, with a secure and compliant account opening process.

How are common stock dividends distributed?

After holding common stock, the company distributes dividends based on performance and board decisions. Dividend amounts and timing are not fixed, typically settled in USD, subject to the company’s announcement.

What are the main risks of investing in common stock?

You will face market volatility, poor company performance, and liquidity risks. Common stock prices are influenced by multiple factors, and you should assess your risk tolerance before investing.

How are common stock voting rights exercised?

You can vote at annual general meetings to elect board members or decide on major matters. Voting rights allow you to participate in corporate governance and influence the company’s future development.

What are the trading methods for common stock?

You can trade through major U.S. exchanges like NYSE and NASDAQ using market orders, limit orders, or stop orders. You can flexibly choose trading methods based on your needs.

You now fully grasp the value, rights, and risks of common stock as the core tool of company ownership. Whether you are pursuing long-term capital appreciation or focusing on stable dividend rights, efficient fund management is the foundation for achieving your investment goals in the global market.

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