A Definitive Guide to Common Shares (And Their Benefits)

By Indeed Editorial Team

Published June 18, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Shares represent a stake of ownership in a company, and common shares are the primary option that most buyers can use to build equity. This method entitles stockholders to dividends and investment protections and also entitles the holder to a fraction of influence over the company's direction and internal policies. Understanding what shares of the common type can provide you may help you decide which options are right for you when deciding to buy. In this article, we define common shares, look at other forms of investment through comparison, and examine the mutual benefits they offer shareholders and companies.

What are common shares?

Common shares are the conventional portions of stock that represent an investor's stake in a company. They're also the smallest unit of equity allowable for purchase. When a company goes public, its share prices adjust according to supply and demand. When demand for shares increases, their price rises. If supply outweighs demand, their price drops. Through the purchase of shares, investors gain stock in a company and may profit over time from that company's growth. You purchase shares independently or through brokers who leverage the buying and selling of shares as a profession.

A common share is designed as the majority share type, among other forms of equity. These shares also classify a shareholder as a common shareholder. Common shareholders have unique rights that might incentivize some buyers. They have a right to vote on that company's referenda, leadership, and other personnel decisions that may influence its future operations. They're also the last of all interested parties to receive dividends and assets if the company liquidates.

Related: What Is Equity in a Company? (With Definition and Types)

Common shares vs. other options

Common shares are one of many options offered by companies. Some options trade on the open market while others don't, but aspects sometimes overlap. By informing yourself about the differences in the types of stakes available for investors, you might make a more informed decision. Here are some comparisons that add further context for prospective common shareholders:

Common vs. preferred shares

Common and preferred shares resemble each other, but differ in several important ways. They both return dividends to the stockholder and afford a portion of ownership over the company. Preferred shares entitle the shareholder to a faster dividend payout and, if necessary, priority over common shareholders during the company's liquidation. The dividends of preferred shares likewise have a fixed rate, but don't include the incentive of rights to vote over company referenda.

Preferred stakeholders reflect a niche need in the investment market that offers less return from personal shares and more security against the performance of the company. Prospective shareholders might purchase preferred shares over common if they don't expect rapid growth. In this way, preferred shares are closer to a bond because they frequently recoup their principal investment by design. Unlike bonds, preferred shares keep some return on investment resulting from company growth.

Related: Debt vs. Equity Financing (With Types and Example)

Shareholder vs. stakeholder

Despite being quite similar, stakeholders can differ from shareholders in a variety of ways. Stakeholders hold an investment in a company in ways that include and exceed equity. For that reason, all shareholders are stakeholders. Employees, managers, and board members are also stakeholders, especially if they rely on the company through recurring transactions in exchange for services or benefits. Communities, suppliers, governments, and manufacturers may also have a tangible stake in a company through contractual obligations and regional limitations. Common shareholders are internal stakeholders because they have an immediate relationship with the company.

Related: What Is a Stakeholder, and How Should You Prioritize Them?

Shareholder vs. creditor

Creditors and shareholders differ to varying degrees in how they contribute to a company's success. In both cases, shareholders and creditors add to the liquid assets of a company, increasing their spending power and potentially contributing to its growth. Common shareholders may receive unsecured company assets resulting from bankruptcy after the company pays all other shareholders. Before that process takes place, creditors receive secured debt along with any outstanding interest. This hierarchy of repayment establishes one of the primary risks associated with investment. Buying and selling through experienced brokerages is a popular option for this reason.

Mutual benefits

Going public and releasing an initial product offering (IPO) is a process that potentially benefits both company and investor. IPOs generate many additional opportunities for mutual benefits between the company by involving marketing firms, legal firms, and investor relations experts, but companies and shareholders can benefit mutually in an enduring way from the same factors that result from issuing a common type of shares. Here are some factors that lead to mutual benefits:

Going public

When a company goes public, a variety of outcomes become possible. The sales from the company's initial stock offering can compensate for startup costs, which reduces debt and helps their financial portfolio. It might also allow the company to spend additional capital generated from the sale of shares. An attractive portfolio combined with the ability to spend might allow the company to grow at a faster pace than if it had remained private.

For the prospective shareholders, a new company going public might represent an opportunity to invest early in a company that's planning on expansion. This might lead to a higher return on investment compared with buying common shares in a company two years into its public phase. It may also allow for shares at a lower price compared with others on the market for similar, more established companies. Buyers interested in fast growth may envision both opportunities as part of their strategy.

Brand loyalty

A stockholder may care more about a company they invest in, so a company that encourages investment might nurture that outcome. Loyalty matters in retaining long-term relationships with customers and shareholders alike. Transitioning customers and employees into shareholders by granting shares may encourage them to spend more money with the company and give it increased word of mouth. The mutual benefits of this strategy have less to do with the profitability of stocks than with the relationship even a small share purchase can foster.

For example, company employees might receive an offer to become stakeholders with increasing benefits and options according to their seniority and length of employment. The company can choose to offer bonus shares if employees refer candidates to the company during the busy seasons. Good employee experiences extend to customers and the company's brand naturally gains the reputation that they treat their employees with care. When the company extends special share purchasing options to customers, they might include themselves in the company's noteworthy goodwill.

Limited liability

Limited liability is a strategy expressed through protective rights for common shareholders that also protects a company's growth in the stock market. Shareholders with limited liability are responsible for the value of their shares, but aren't subject to the financial obligations of the company. In some cases, they may receive pre-emptive rights, like access to new or discounted share options before non-shareholders.

Companies might benefit from limited liability shares if it helps build trust with buyers. Cautious buyers may respond to financial protections by buying shares they might not have, whereas others might purchase the common option as a hedge against their riskier shares. Even if the company liquidates its shares, the stakeholders might appreciate the efforts made to protect them against the possibility of bankruptcy.

Related: How to Conduct a Risk Assessment (Tips and Definition)

Accountability

Because common shareholders have influence over the direction of companies through their ability to vote, companies and shareholders co-regulate decisions by negotiating and correcting changes through a formalized process. The presence of shareholder accountability, itself, may attract new buyers who want a stake in companies that value accountability. The price of shares is one factor that some stakeholders might use to hold companies accountable. These reactive trends in selling might be of value to companies as data for later analysis.

For example, a company might remove a key feature from a flagship product and generate a negative first impression among consumers. Stakeholders with the power to vote may exercise their rights, while other stakeholders react to the change by selling their shares. The care and concern reflected in these reactions might factor into marketing and iterative product design to release a more popular product in the future.

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