Textbook Definition:
Common shares represent fractional ownership in a company. Each share has defined voting rights that may allow shareholders to participate in corporate leadership decisions.
What it means:
A little history lesson: In the Middle Ages, European and Chinese merchants separately came up with the idea of the joint stock company to formalize shared ownership of profit-seeking enterprises among multiple individuals or families. By broadening the ownership base, companies could raise more capital and grow larger than was possible previously with sole proprietorships. That’s essentially the same system today.
Today’s stock owners make money in two ways: through capital gains, which is the growth in price from the day you buy to the day you sell, and via dividend payments, which is money paid out of profits to shareholders. (Of course, share values can also fall to zero should the company go bankrupt.) How much you make depends on how many shares you own.
Shareholders also have a commensurate voice in corporate decisions, such as choosing board members, executive compensation and more. Investors often overlook the voting privileges that come with owning company stock. As long as the company meets an individual shareholder’s investment objectives, which could include profitability, growth, dividend payout and environmental, social and corporate governance (ESG) targets, they may be content to accept the way the business is governed. Some founding or controlling shareholders prefer to maintain control over all corporate decisions but still desire public share ownership because it can be a good way to access investment capital without taking on debt. In this case, a corporation may offer two classes of common share. For example, a business could have a small number of class A shares, usually controlled by a founder or family, that come with voting rights, while average investors would hold class B shares, which are also considered common shares, but these shares would not have voting rights.
10-Second Take:
Common shares provide a way for individual investors to own a portion of a publicly traded company.
