Section 1.5: Benefits and Risks of Owning Common Stock

  • Benefits: Growth, income, and limited liability.

  • Risks: Market value risk, reduced dividends, and lowest priority at dissolution.

Benefits of Common Stock Ownership

1. Growth (Capital Appreciation)

  • Common stock has strong potential for long-term growth through capital gains — the increase in a stock’s market price.

  • Historically, capital gains outpace inflation, making common stock a good hedge against inflation.

2. Income (Dividends)

  • Many corporations pay regular quarterly cash dividends to shareholders.

  • Dividends can increase over time as the company becomes more profitable.

  • Provides investors with passive income in addition to growth potential.

3. Limited Liability

  • A shareholder’s personal assets are protected if the corporation goes bankrupt.

  • The maximum loss is the amount invested in the stock.

  • Example: If an investor buys $5,000 of stock and the company fails, they may lose that $5,000, but no more — they are not responsible for company debt.

Benefits & Risk

〰️

Benefits & Risk 〰️

Risks of Common Stock Ownership

1. Market (Value) Risk

  • The stock’s market price can fall, leading to potential losses if sold at a lower price.

  • The value of the investment is not guaranteed and can fluctuate with market conditions.

2. Dividend Risk

  • Dividends may decrease or stop if the company becomes unprofitable.

  • Dividend payments are not guaranteed — they depend on Board of Directors’ decisions.

3. Low Priority at Dissolution

  • In the event of corporate bankruptcy, common stockholders are last in line to receive assets.

  • Bondholders and preferred shareholders are paid first.

  • Common shareholders often receive nothing after liquidation.

Next Section

✺ Review questions ✺

  • It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more.

  • It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more.

  • It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more.

  • It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more.

  • It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more.

  • It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more.