Common stock is a share of ownership in a company, not a bank account
Common stock is a piece of a business that you can buy and own. When you own common stock, you own a small part of that company. This is different from a bank account, which holds your money and earns interest. With common stock, you own a piece of the business itself, and the value of what you own can go up or down depending on how well the company does.
If a company has issued one million shares of common stock and you own one thousand of them, you own one-tenth of one percent of that company. You can buy and sell these shares through a brokerage account — a special account that lets you trade stocks — or through a retirement account like a 401(k) or IRA.
Key Takeaways
- Common stock represents ownership in a company, and its value changes based on how the market values the business.
- As a common stockholder, you have voting rights on major company decisions and may receive dividends if the company distributes profits.
- You buy and sell common stock through a brokerage account, not through a traditional bank account.
- Common stock is riskier than bonds or savings accounts because the value can fall to zero if the company fails.
- Many people hold common stock as part of a long-term investment strategy through retirement accounts or taxable brokerage accounts.
How ownership in a company actually works
When a company wants to raise money, it can sell pieces of itself to the public. Each piece is called a share. If you buy shares, you become a shareholder — an owner of the company. The more shares you own, the larger your ownership stake.
Your ownership stake gives you two main rights. First, you can vote on certain company decisions, such as who sits on the board of directors or whether to approve a major merger. Second, if the company makes a profit and decides to share it with shareholders, you receive a payment called a dividend. Not all companies pay dividends — some reinvest all profits back into the business.
The value of your shares changes every trading day based on what other people are willing to pay for them. If investors believe the company will do well, they bid the price up. If they worry the company is struggling, the price falls. This is why stock ownership carries risk: you could lose money if the price drops below what you paid.
The difference between common stock and preferred stock
Most individual investors own common stock, but companies can also issue preferred stock. Preferred stockholders have a claim on company profits before common stockholders do — if the company pays a dividend, preferred shareholders get paid first. Preferred stock also typically has a fixed dividend rate, so you know what payment to expect.
The tradeoff is that preferred stockholders usually cannot vote on company decisions, and their shares typically do not rise in value as much as common stock when the company does well. Common stock offers voting rights and higher growth potential, but lower priority for dividends and greater risk if the company struggles.
Where you actually buy and hold common stock
You cannot buy common stock through a regular bank savings or checking account. Instead, you need a brokerage account — an account specifically designed for buying and selling investments. You can open a brokerage account with companies like Fidelity, Charles Schwab, E*TRADE, or many others. Some banks also offer brokerage services alongside their regular banking products.
Many people also own common stock indirectly through retirement accounts. If you have a 401(k) through your employer or an IRA that you opened yourself, the money in that account is often invested in common stock (usually through mutual funds or exchange-traded funds, which bundle many stocks together). You do not see the individual stock certificates, but you own pieces of many companies.
When you buy common stock, you pay a price per share set by the market at that moment. You can place an order to buy a certain number of shares, and the brokerage executes the trade. You can sell your shares whenever the market is open, though the price you receive depends on what buyers are willing to pay at that time.
What happens to your money when you own stock
When you buy common stock, your money is no longer in a bank account earning a small, may provide interest rate. Instead, it is tied up in the company's value. If the company grows and becomes more profitable, the stock price typically rises, and your investment grows. If the company struggles or the market loses confidence in it, the stock price falls, and your investment shrinks.
Some companies return profits to shareholders through dividends, usually paid quarterly. A dividend might be a few cents per share, or it might be several dollars, depending on the company's profitability and dividend policy. Other companies reinvest all profits into growth and pay no dividend at all.
If a company goes bankrupt, common stockholders are last in line to receive any remaining assets — creditors and preferred stockholders get paid first. In many bankruptcies, common stockholders lose their entire investment.
Why people hold common stock as a long-term investment
Despite the risk, many people own common stock because historically, stock prices have risen over long periods. If you buy stock in a solid company and hold it for ten, twenty, or thirty years, you have time to ride out the ups and downs. The longer your time horizon, the more the short-term price swings matter less.
Common stock is also a way to own a piece of successful businesses without running them yourself. If you believe a company will grow and become more valuable, you can own that growth by holding its stock. Dividends also provide a stream of income on top of any price appreciation.
For retirement savings, common stock (usually held through mutual funds or index funds in a 401(k) or IRA) is a core building block because you have decades until you need the money. For shorter-term goals, common stock is riskier because you might need the money when the price is temporarily down.
Common stock versus bonds and other investments
Common stock is one of several ways to invest money. Bonds are loans you make to a company or government; they pay a fixed interest rate and return your principal at a set date. Bonds are generally less risky than stock but also offer lower potential returns. A savings account at a bank is the safest option but earns very little interest.
Many investors hold a mix of all three: some money in savings for emergencies, some in bonds for steady income, and some in common stock for growth. The mix depends on your age, how much risk you can tolerate, and when you need the money. Someone saving for retirement decades away might hold mostly stock; someone who needs the money in five years might hold mostly bonds and savings.
Frequently Asked Questions
Can I lose all my money if I own common stock?
Yes. If a company goes bankrupt, the stock can become worthless. However, if you own stock in a large, established company and hold it for many years, the historical odds favor a gain. The risk is highest with small, new companies or if you invest money you cannot afford to lose.
Do I have to hold common stock forever?
No. You can sell your shares whenever the stock market is open, usually during business hours on weekdays. You will receive whatever price the market is offering at that moment. If the price has risen since you bought, you make a profit; if it has fallen, you take a loss.
What is the difference between common stock and a mutual fund?
Common stock is a single company's shares. A mutual fund is a basket of many stocks (or bonds, or both) bundled together and managed by a professional. Mutual funds reduce risk by spreading your money across many companies instead of betting on one.
Do I pay taxes on common stock I own?
You pay taxes when you sell stock at a profit (called a capital gain). You may also owe taxes on dividends you receive. If you hold stock in a retirement account like a 401(k) or traditional IRA, taxes are delayed until you withdraw the money. A financial advisor or tax professional can explain how your specific situation works.
Is common stock the same as a stock option or warrant?
No. Common stock is actual ownership in the company. A stock option is the right to buy or sell stock at a set price in the future; a warrant is similar. Options and warrants are more complex and riskier than owning the stock itself.