What is Common Stock? Advantages and Risk - Arbor Asset Allocation Model Portfolio (AAAMP) Value Blog (2024)

FAQs

What are the advantages of common stock? ›

Common stocks, when compared to bonds and deposit certificates, perform better. However, there is no upper limit on the investor's earnings from their common stock holdings. Therefore, common stocks are less expensive and more practical alternatives against debt investment.

Common stock is a representation of partial ownership in a company and is the type of stock most people buy. Common stock comes with voting rights, as well as the possibility of dividends and capital appreciation. You can find information about a company's common stock in its balance sheet.

Other potential risks of owning common stocks include lack of diversification, foreign exchange, interest rates and country and company-specific issues. Many investors buy exchange-traded funds (ETFs) to diversify their common-stock portfolios more easily.

Compared to preferred stock, common stock prices may offer lower dividend payouts. And those dividends may be less consistent, in terms of timing, based on market conditions and company profits. On the other hand, investors who own common stock may benefit more over the long term if those shares increase in value.

Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.

Liquidation rights: Common stockholders have liquidation rights that allow them access to the company's assets in case of liquidation. If the company is liquidated or becomes bankrupt, these stockholders have a right to claim organizational assets after all debts and liabilities are cleared.

Broadly speaking, preferred stock is less risky than common stock because payments of interest or dividends on preferred stock are required to be paid before any payments to common shareholders. This means that preferred stock is senior to common stock.

Is common stock good or bad? ›

Common stock tends to outperform bonds and preferred shares. It is also the type of stock that provides the biggest potential for long-term gains. If a company does well, the value of a common stock can go up. But keep in mind, if the company does poorly, the stock's value will also go down.

Common stock is a type of security that represents ownership of equity in a company. There are other terms – such as common share, ordinary share, or voting share – that are equivalent to common stock.

Stocks are much more variable (or volatile) because they depend on the performance of the company. Thus, they are much riskier than bonds. When you buy a stock, it is hard to estimate what return you will receive over time (if any). Nonetheless, the greater the risk, the greater the return.

Market risk occurs when an investment's value declines due to a market or economic circ*mstance. The Great Recession of 2008 is an excellent example of market risk.

Advantages of issuing common stock:

This investment brings higher returns through capital gains and dividends anytime the company's stock valuation rises. On the other hand, dividends arise when the company remains with substantial revenue after clearing its commitments.

Bottom Line. Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.

Compared to preferred stock, common stock's profit potential tends to come more from growth in share price over time rather than dividends. Common stock has higher long-term growth potential than preferred stock but also has lower priority for dividends and a payout in the event of a liquidation.