Common Stock

Common Stock (also known as 'Ordinary Shares' in the UK and other parts of the world) represents a slice of ownership in a public company. When you buy a share of common stock, you're not just buying a piece of paper or a blip on a screen; you're becoming a part-owner of a real business. This ownership stake is called Equity. As a part-owner, or Shareholder, you have a claim on the company's Assets and earnings after it has paid all its debts and other obligations. Unlike lenders who are promised fixed payments, your potential return is theoretically unlimited, growing as the company prospers. However, this potential for high reward comes with higher risk. Shareholders are the last to be paid if a company fails. In essence, buying common stock is a vote of confidence in a company's future, giving you a seat at the table to share in its triumphs and its trials.

Think of owning common stock like owning a piece of your favorite local pizza shop. You don't get to toss the dough every day, but you have a say in the big decisions and you get a share of the profits.

Your ownership stake, no matter how small, grants you certain rights. The most significant of these are Voting Rights. Shareholders typically get one vote per share to elect the company's Board of Directors. The board is responsible for overseeing management and making major corporate decisions, like hiring or firing the CEO. While your few hundred shares won't single-handedly change the board of a massive corporation, you are part of a collective of owners whose interests the board is legally obligated to serve. This is the bedrock of corporate governance and your primary way of influencing the company's direction.

As a part-owner, you stand to profit in two main ways:

• Capital Gains: If the business performs well, its value increases. Other investors will be willing to pay more for a slice of that successful pie. When the price of your stock goes up and you sell it for more than you paid, the profit is called a capital gain. This is the most common way investors make money from stocks.
• Dividends: When a mature company generates more cash than it needs to reinvest in its own growth, the board may decide to distribute some of the profits directly to shareholders. These payments are called dividends. While not all companies pay them (especially young, high-growth ones), they can provide a steady stream of income. Profits not paid out as dividends are called Retained Earnings, which are reinvested back into the business to fuel future growth—hopefully leading to even greater capital gains down the road.

For a value investor, common stock isn't a lottery ticket; it's a long-term partnership with a business. Understanding both the potential and the peril is key.

The immense upside of common stock comes with a significant catch: Risk. In the event of a corporate Liquidation (i.e., the company goes bankrupt and sells off all its assets), common stockholders are last in line to get paid. The company must first pay all its Creditors (like banks and Bond holders) and then the owners of Preferred Stock. Whatever is left over—if anything—is distributed among the common stockholders. This is why it's crucial to invest in financially robust companies with a low probability of going bust. As Warren Buffett says, “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”

A Value Investor, in the tradition of Benjamin Graham, doesn't chase hot trends or speculate on short-term price movements. Instead, the goal is to buy shares in a great company for less than they are worth. The key is to distinguish between a company's Stock Price (what you pay for a share on the market) and its Intrinsic Value (what the business is truly worth). A value investor diligently analyzes a company's financial health, competitive advantages, and management quality to estimate its intrinsic value. When the market, in a fit of pessimism or neglect, offers shares at a price significantly below that estimated value—a 'Margin of Safety'—the value investor buys. The strategy is simple but not easy: buy wonderful businesses at a fair price and hold them for the long term, letting the value of the business and the power of compounding do the heavy lifting.

Understanding common stock is easier when you compare it to its close relatives in the investment world.

While both are types of stock, they serve different purposes for investors.

• Common Stock: Offers voting rights and unlimited potential for capital gains. However, dividends are not guaranteed, and you're last in line in a bankruptcy. It's built for growth.
• Preferred Stock: Typically has no voting rights. It usually pays a fixed, predictable dividend, much like a bond. In a liquidation, preferred shareholders are paid before common shareholders. It's a hybrid, with features of both stocks and bonds.

This is the classic ownership vs. loanership distinction.

• Owning (Common Stock): You are a part-owner. Your return depends on the company's success and is potentially unlimited. You accept higher risk for a higher potential reward.
• Loaning (Bonds): You are a lender to the company or government. You receive a fixed Interest payment over a set period. Your return is capped, but your investment is generally safer than stock because bondholders get paid before shareholders.

Common stock is the primary vehicle for participating in the long-term value creation of the global economy. It's the engine of capitalism in your portfolio. For the patient, disciplined value investor, it's not about gambling on stock tickers; it's about becoming a long-term business partner in wonderful enterprises. By focusing on the underlying business and buying with a margin of safety, you can harness the power of common stock to build real, lasting wealth.