Section 1.2: Common Stock Basics

  • What common stock represents (ownership).

  • Why companies issue stock (to raise capital).

  • Authorized, issued, outstanding, and treasury stock definitions.

Investor Benefits

  1. Capital Appreciation – Increase in stock price over time.

  2. Dividends – A portion of company earnings distributed to shareholders.

  3. Voting Rights – Stockholders vote on key corporate matters, such as electing the Board of Directors (BOD).

💡 Example:
If a corporation issues 100 shares of stock, each share represents 1/100 (or 1%) ownership of the company.

What is Common Stock?

  • Common stock is the most common type of equity security.
    When an investor purchases common stock, they become a partial owner of a corporation.

  • Each share represents a unit of ownership in the company.

Why Companies Issue Stock

  • Corporations issue (sell) stock to raise capital — money used to grow, expand, or fund operations.

    • Investors who purchase shares are called shareholders.

    • Shareholders share in the company’s profits (dividends) and potential price appreciation (capital gains)..

Stockholder Voting

  • Voting usually occurs annually at shareholder meetings.

  • Investors elect directors to oversee corporate management and policy.

  • Shareholders do not participate in daily business decisions — the Board and executives handle that.

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Corporate Charter & Issuance Process

  • A corporation is formed by filing a corporate charter with the state where it is domiciled (incorporated).

  • The charter authorizes a specific number of shares the company may issue.

  • The company often issues only a portion of these shares initially.

  • If more shares are needed later, the charter must be amended, typically requiring shareholder approval.

Outstanding vs. Treasury Stock

  • Outstanding stock = in the hands of investors.

  • Treasury stock = repurchased shares that the company holds (can reissue or retire).

    • Treasury shares do not have voting rights or receive dividends.

    • They are excluded from the company’s market capitalization.

💡 Market Capitalization =

(Outstanding Shares × Current Market Price)
Treasury shares are excluded because they’re not in public hands.

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✺ Review questions ✺

  • Ownership (equity) in a corporation.

  • Dividends and capital appreciation.

  • Shareholders, usually at the annual meeting.

  • Issued stock repurchased by the corporation; has no voting rights or dividends.

  • Outstanding stock (shares held by investors).