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What is common stock?

Author:
Harold Averkamp, CPA, MBA

Definition of Common Stock

Common stock refers to the shares of ownership interest in a U.S. corporation. The owners of the common stock are referred to as common stockholders, common shareholders, or simply as stockholders or shareholders. [A relatively few corporations issue preferred stock in addition to its common stock.]

Generally, the holders of common stock:

  • Elect the corporation’s board of directors
  • Vote on mergers
  • Participate in increases and decreases in the market value of the shares of common stock
  • Receive cash dividends as the corporation’s earnings and cash needs permit

A drawback of common stock is that the common stockholders are last in line to receive money if a corporation is dissolved.

Common Stock is also the title of the general ledger account that is credited when a corporation issues new shares of common stock. (The detailed recording depends on each state’s regulations.) The balance in Common Stock will be reported in the corporation’s balance sheet as a component of paid-in capital, a section within stockholders’ equity.

Example of Common Stock

Assume a corporation has been authorized by the state in which it is organized to issue 500,000 shares of common stock with no par value. If the corporation actually issues only 100,000 shares for $50 each, the corporation will debit its Cash account for $5,000,000 and will credit its account Common Stock for $5,000,000. The corporation will now have 100,000 shares of common stock outstanding. If a stockholder owns 1,000 shares of the common stock, the stockholder owns 1% of the corporation. If the corporation declares a divided of $0.10 per share, this stockholder will receive a dividend of $100 (1,000 shares X $0.10).

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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