What is Common Stock?

Common stock is an ownership share in a corporation . The holders of common stock have voting rights at shareholder meetings and the opportunity to receive dividends . If the corporation liquidates , then common stockholders receive their share of the proceeds of the liquidation after all creditors and preferred stockholders have been paid.

Advantages of Common Stock

The main advantage of common stock is that the residual earnings and value of a business accrue to the common stockholders. This can result in substantial rewards if a business is highly profitable.

Disadvantages of Common Stock

Common stockholders are paid last if a business liquidates, so there is a significant risk that they will lose all their money if a corporation goes bankrupt.

Common Stock Par Value

In many states, law requires that a par value be assigned to each share of common stock. Par value is technically the legal price below which a share of stock cannot be sold. In reality, par value is routinely set at the minimum possible amount, and is not even required under the incorporation laws of some states. Thus, par value is irrelevant in most cases.

Presentation of Common Stock

The dollar amount of common stock recognized by a business is stated within the equity section of the company balance sheet . The amount of common stock that a business records is split between the common stock account and the additional paid-in capital account; the sum total recorded matches the price at which the company sold shares to its investors.

Related AccountingTools Courses

Accountants' Guidebook

Corporate Finance