Common Stock

Updated on April 19, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Common Stock?

Common stocks are the number of company shares  that are found on the company’s balance sheet. Common Stockholders are the company’s owners; they  earn voting rights and are eligible for dividends. They can either be company promoters, insiders, or outside investors.

What Is Common Stock

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Common stockholders have ownership in the company. Due to their voting rights, they have control of the company’s affairs and can vote and elect the directors. If the entity has good performance, these shareholders get very high returns, which comes with a huge risk loss if the stock price goes down or the company goes bankrupt.

Key Takeaways

  • Common stock represents the number of company shares and is found on the balance sheet, and common stockholders are the company’s owners who have voting rights and earn dividends.
  • The common stock formula is Outstanding Shares = Number of Issued Shares – Treasury Stocks. Outstanding shares are the number of shares available to the company owners; treasury shares are shares bought back by the company, and issued shares are the total number of shares issued by the company.
  • Companies cannot issue more shares than authorized shares but can issue fewer and buy back shares as part of their corporate strategy.
  • Examples of common stock calculations include calculating the number of outstanding shares for a company and understanding the meaning of authorized shares, issued shares, and treasury stocks. These examples use data from quarterly filings of US stocks in the steel industry.

Common Stock Explained

The common stock on balance sheet are shares issued by an entity to the general public for investing in them. The capital raised through this method is used to finance the working of the business. Common stockholders have voting rights and are entitled to get dividend on their holdings.

Depending on the business performance, the value of shares go up or down. Thus, it can be said that common stock have high return but high risk too. If stocks perform well, their price go up and investors earn huge profit. However, if price go down they may suffer huge losses. Similarly, such stocks holders can claim there share if the company dissolves or goes bankrupt, only after all the debtholders are paid. Common shareholders are the last ones to get any compensation during the company’s bankruptcy.

This fact makes them highly risky investments. However, there are ways to mitigate or manage such risks.

Their voting rights allow them to participate in policy decision-making, elect directors, participate in corporate policies, etc.

Common Stock Formula in Video

 

Types

The various types of common stock on balance sheet as follows:

  1. Growth stocks – Such stocks are of entities that have good future growth opportunities and are also currently growing rapidly through latest innovation and well-designed strategies.
  2. Value stocks – Such stocks are currently trading at at a price lower than their intrinsic value. They have strong fundamentals and has the chanceof increasing in value in the future. Since they are underpriced, they are more affordable and offer good investment options.
  3. Large- cap stocks – They have a very high market capitalization and include those companies that are very well established, operating for many years and very stable.
  4. Mid-cap stocks – These are stocks that have a fairly good market capitalization but lower than large-cap stocks.
  5. Small-cap stocks – Small-caps are mostly new companies with very less market capitalization.

Thus, from the above details, we can understand the various valuation of common stock.

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Formula

Let us look at the formula for valuation of common stock.

Common Stock (Outstanding Shares) = Number of Issued Shares – Treasury Stocks

common stock Formula

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  • Outstanding shares – Outstanding shares are the number of shares available to the company owners who hold a portion of the business. These holders can be company insiders or outside shareholders.
  • Treasury Shares – Treasury Shares the shares bought back by the company.
  • Issued Shares – Issued shares are the total number of shares issued by the company out of the overall pool of authorized shares.

Examples

Let’s see some simple to advanced examples of issuance of common stock calculation to understand it better.

You can download this Common Stock Formula Excel Template here – Common Stock Formula Excel Template

Example #1

Let us take an arbitrary example of company A to find out how to calculate the number of outstanding shares of the company. We will also try to understand what authorized shares, issued shares, and treasury stocks mean. For example, suppose the number of authorized shares for a company is 5000 shares.

Suppose the treasury stock portion is 500 shares. Authorized share is the maximum number of shares a common issue mandated during a company’s public offering.

The snapshot below represents all the data required for common stock formula calculation.

Common Stock formula eg 1

Calculation of outstanding shares will be as follows,

Common Stock formula eg 1.1jpg

Number of outstanding shares= 2000-500= 1500.

Therefore, the number of outstanding shares will be – 

A number of outstanding shares = 1500.

The issuance of common stock cannot be more than the authorized number but can give less than the number of authorized shares. For example, the company issued 2000 shares during a public offering. So, in this case, the number of shares issued is equal to the company’s outstanding shares. Companies sometimes buy back sharesBuy Back SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more, which is part of their corporate strategy. If the company buys back its shares, that portion of the share is with the company, and the equity owners do not own that share.

Example #2

Let us look at the common of a company from its quarterly filing. The company AK Steel is a US stock in the steel industry. Below is the snapshot of the shareholder’s equity section for the company AK Steel. The company reports in its quarterly filling the information for its common stocks.

The information includes the number of authorized shares and the maximum amount of shares the company can issue.

The snapshot below represents all the data required for common stock formula calculation.

Common Stock formula eg 2

Therefore, the calculation of the number of outstanding shares will be as follows,

Common Stock formula eg 2.1jpg

Number of outstanding shares= 316,569,578 – 1,059,088

The number of outstanding shares will be – 

Common Stock formula eg 2.2jpg

Number of outstanding shares =315,510,490

The number of authorized shares for AK Steel is 450,000,000 shares. The company issued fewer shares than it was authorized to issue, which is 316,569,578 shares. The number of treasury shares for the company, which is the number of shares bought back by the company that is no longer part of outstanding shares and do not receive any dividend, is 1,059,088.

Advantages

It is necessary to understand the advantages in the various features of common stock.

  • Such stocks have voting rights which give the opportunity to shareholders to participate in the decision making process and other corporate policies and procedures.
  • They offer liquidity to the company because investors can invest in such stocks any time and also sell them anytime to get back the money.
  • Investors are not responsible in case the company gets into any legal problems.
  • Common stocks have the capacity to give very high returns if the company performs well.

Disadvantages

The features of common stock also has some disadvantages as give below.

  • Investors are the last ones to get back their investments if the company goes bankrupt.
  • Due to the above reason, the risk is very high.

Common Stock Vs Preferred Stock

Let us look at some of the differences between common stock and preferred stock.

  • The former has voting rights, whereas the latter has no voting rights.
  • The former is highly volatile, but the volatility of preferred stock is very less.  
  • Common stocks may or may not get dividend but preferred stock will always get dividend.
  • In case the company is dissolved or goes bankrupt, the preferred shareholders will receive their share first.

Frequently Asked Questions (FAQs)

What are examples of common stock?

A stockholder owns 1% of the company if they possess 1,000 ordinary shares. This investor will get $100 (1,000 shares X $0.10) in dividends if the company announces a $0.10 per share dividend.

What is the difference between stock and common stock?

The primary distinction between preferred and common stock is that common stock grants stockholders voting rights, while preferred stock does not. As a result, preferred shareholders get dividend payments before regular shareholders since they have a preference over the company’s income.

How is common stock calculated?

The formula for calculating common stock is Common Stock = Total Equity – Preferred Stock – Additional Paid-in Capital – Retained Earnings + Treasury Stock.

Recommended Articles

This has been a guide to what is Common Stock. We explain its difference with preferred stock, its formula, examples types, advantages & disadvantages. You can learn more about accounting from the following articles –

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