Common Stock

Lesson

Common stock is a type of security representing ownership in a corporation. Common stockholders have the right to vote on corporate matters, such as electing the board of directors and approving mergers and acquisitions. They also have the right to receive dividends, which are not guaranteed. In addition, common stockholders have the lowest priority in the capital structure, meaning they are the last to receive any assets in the event of a company's liquidation.

Practice Question #1

Which of the following is a characteristic of common stock?

A) Guaranteed dividends

B) Priority in liquidation

C) Voting rights

D) Fixed maturity date

Select an option above to see an explanation here.

A) Dividends are not guaranteed for common stockholders. B) Common stockholders have the lowest priority in liquidation. C) Common stockholders have voting rights on corporate matters. D) Common stock does not have a fixed maturity date.

Terms

Common stock:: A type of security representing corporation ownership.
Dividends:: Payments made by a corporation to its shareholders, usually in the form of cash or additional shares.
Voting rights:: The right of common stockholders to vote on corporate matters.

Practice Question #2

In the event of a company's liquidation, which group has the lowest priority in receiving assets?

A) Bondholders

B) Preferred stockholders

C) Common stockholders

D) Convertible security holders

Select an option above to see an explanation here.

A) Bondholders have a higher priority than common stockholders. B) Preferred stockholders have a higher priority than common stockholders. C) Common stockholders have the lowest priority in receiving assets. D) Convertible security holders have a higher priority than common stockholders.

Do Not Confuse With

Preferred stock:: A type of security that represents ownership in a corporation but has priority over common stock in terms of dividends and liquidation.
Bonds:: Debt securities issued by corporations or governments that pay interest and have a fixed maturity date.
Convertible securities:: Securities that can be converted into a specified number of common shares at the holder's option.

Practice Question #3

What is the difference between authorized shares and outstanding shares?

A) Authorized shares are the maximum number of shares a corporation can issue, while outstanding shares are the number of shares held by shareholders.

B) Authorized shares are the number of shares a corporation has actually issued, while outstanding shares are the maximum number of shares a corporation can issue.

C) Authorized shares are the number of shares held by shareholders, while outstanding shares are the maximum number of shares a corporation can issue.

D) Authorized shares are the number of shares a corporation has actually issued, while outstanding shares are the number of shares held by shareholders.

Select an option above to see an explanation here.

A) Authorized shares are the maximum number of shares a corporation can issue, while outstanding shares are those held by shareholders. B) This statement reverses the definitions of authorized and outstanding shares. C) This statement reverses the definitions of authorized and outstanding shares. D) This statement confuses authorized shares with issued shares.

Historical Example

In the early 2000s, a large telecommunications company filed for bankruptcy due to massive debt and accounting scandals. As a result, the company's assets were liquidated, and its common stockholders received nothing, as all proceeds went to pay off the company's creditors and preferred stockholders.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A popular technology company's capital structure includes common stock and debt. The company has been successful and consistently pays dividends to its common stockholders. However, if the company faced financial difficulties and needed to liquidate, common stockholders would be the last to receive any assets, after creditors and preferred stockholders.