Common Stock is the primary equity instrument issued by a corporation to raise capital. Holders of common stock are residual owners of the company and typically have voting rights on major corporate matters, such as electing the board of directors.
Why is Common Stock Important?
Common Stock is important because it:
Reflects Ownership: Common shareholders have a claim on the company’s assets and earnings after obligations to creditors and preferred shareholders are met.
Drives Governance: Voting rights empower shareholders to influence corporate strategy, governance, and executive compensation.
Offers Upside Potential: Participating in dividends and share price appreciation provides potential for capital gains.
How is Common Stock Measured?
On the balance sheet, Common Stock is recorded at par value with any excess recorded in Additional Paid-In Capital:
1Common Stock = Par Value per Share × Numberof Shares Issued
2Additional Paid-In Capital = Issue Price − Par Value
Where:
Par Value: Nominal value assigned to each share, often a small amount.
Additional Paid-In Capital: The amount investors pay over par value when purchasing shares at issuance.
Additional Considerations
Dilution Effects: Issuing new shares or converting convertible instruments can dilute existing ownership percentages and earnings per share.
Dividend Policy: Common shareholders receive dividends only after preferred dividends are paid, and dividend amounts depend on board decisions.
Market Valuation: Common stock trades on public exchanges or privately, and market price reflects investors’ expectations of future performance and risk.