Common stocks are securities representing ownership in a corporation which provide voting rights and entitle the holder to a share of the company’s success through dividends and/or capital appreciation. Common stocks are the most common form of equity investment. All publicly traded companies issue common stock. If you hold common stock, you’re in a position to share in the company’s success as the value of the company’s common stock rises and/or the company pays dividends to its shareholders. However, by owning common stock you are also in a position to feel the lack of success a company may experience. Your initial investment (principal) is not guaranteed. Furthermore, there is no guarantee of continued dividend payments, which depends on the company’s ability to maintain or grow its current or retained earning.
In the event the company fails, common shareholders have the last claim on the company’s assets. They are the last to claim any amount remaining from the liquidation of corporate assets after the creditors, bondholders, and preferred shareholders are paid, thus subjecting the investor to the potential for substantial losses. If a company is not profitable, or if investors are selling rather than buying its stock, your shares may decrease in value. The performance of an individual stock is also affected by what’s happening in the stock market in general, which in turn is affected by the economy as a whole. If you’ve seen the jagged lines on charts tracking stock prices, you know that prices fluctuate throughout the day, week, month, and year, as demand goes up and down in the markets. If a stock has a relatively large price range over a short period of time, it is considered highly volatile and may expose the investor to an increased risk of loss.