What is Common Stock? – Common stock is a type of equity share issued by a corporation or entity. The buyers of common stock are referred to as shareholders.
Why Issue Common Stock? – When a company needs to raise capital for starting or growing their business they can borrow the money or sell investors (shareholders) shares or ownership in the company.
Ownership Equity – Common stocks are shares or a percentage ownership of an entity. Shares represent a proportional stake in the company’s net worth, income, cash flow, dividends, etc., and usually include voting rights to elect the company directors of the entity.
Risk of Common Stock – Owners of common stocks have no guarantees, but are accepting risk for potential greater gains than other safer investments. Common stock can be very volatile and are generally considered a high risk investment class. In addition, in the case of liquidation of the business, common stock holders are last in line.
Advantages of Common Stocks – Equity ownership provides the highest rate of return in the long run; more than bonds and cash. Common Stocks have provided over a 6% real rate of return in the long run, providing one of the best means to stay ahead of inflation.
Stock ownership is one of the foundations of capitalism and a free enterprise system. The risks of owning common stocks can be partially mitigated through a risk management plan that includes a tactical asset allocation strategy. The advantages of a higher rate of return are considerable because of exponential or compound growth.
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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