Common Stock
Also known as: Shares, Ordinary shares, Equity
A fractional ownership stake in a company — with voting rights, dividend claims and unlimited upside.
- Asset class
- Cash equities
- Instrument type
- Ownership claim
- Traded
- Exchange (listed) or private
- Typical users
- Everyone — retail to pension funds
BeginnerWhat is it, really?
A share of common stock is exactly what the name says: a share of a company. If a company is split into 100 million shares and you own one million of them, you own 1% of the business — 1% of its factories, its brands, its bank account and, most importantly, its future profits.
You can make money in two ways. The company may pay out part of its profit as a dividend, and the market price of the share itself may rise. Neither is guaranteed: stock prices move every second the market is open, driven by profits, interest rates, and the mood of millions of buyers and sellers.
Shareholders are last in line. If the company fails, lenders and bondholders get paid first, and shareholders receive whatever is left — often nothing. In exchange for taking that risk, shareholders keep everything that remains after debts are serviced, which is why equities have historically out-earned safer assets over long horizons.
IntermediateHow it works in practice
Rights that come with the share
- Residual claim on profits and, in liquidation, on assets after all creditors.
- Voting rights — typically one vote per share on directors, mergers and major decisions.
- Limited liability — you can lose your purchase price, never more.
- Pre-emption rights in many jurisdictions: the right to participate in new share issues before outsiders.
How trading actually works
Listed shares trade on exchanges in a central limit order book: buyers post bids, sellers post offers, and trades print where they cross. The difference between the best bid and best offer — the spread — plus commissions and market impact form your real cost of trading. Settlement (the actual exchange of shares for cash) usually happens one business day after the trade (T+1 in the US, T+2 in much of Europe).
What moves the price
In the short run: order flow, news, index flows, positioning. In the long run: earnings and the rate used to discount them. A useful decomposition of realised equity returns is dividend yield + earnings growth ± change in valuation multiple.
AdvancedPricing & valuation
Valuation: discounting the residual claim
The price of a share is the present value of expected cash flows to its holder. The dividend discount model (DDM) with constant growth \(g\) and required return \(r\):
In practice, analysts discount free cash flow to equity or use a two-stage model (explicit forecasts, then a terminal value). The required return \(r\) is commonly estimated with the CAPM:
where \(\beta\) measures the stock's sensitivity to market moves. Multiples (P/E, EV/EBITDA) are shorthand for the same discounting exercise under standardised assumptions.
Risk decomposition
Single-stock returns decompose into market (systematic) and idiosyncratic components, \(R_i = \alpha_i + \beta_i R_m + \varepsilon_i\). Only systematic risk is rewarded in equilibrium; idiosyncratic risk is diversifiable and priced at zero in the CAPM limit.
Corporate actions and the price
On the ex-dividend date the price drops by roughly the dividend amount; splits rescale price and share count with no value effect; buybacks shrink the share count, mechanically raising per-share metrics. Arbitrage keeps these relations tight.