Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Common Stocks ====== Common Stocks (also known as 'ordinary shares') represent a slice of ownership in a publicly-traded company. When you buy a share of a company’s common stock, you’re not just buying a piece of paper or a digital symbol; you are becoming a part-owner of the business. This ownership stake, often called [[equity]], gives you a claim on the company’s assets and, more importantly, its future earnings. As an owner, you get to participate in the company's successes, primarily through potential price increases ([[capital appreciation]]) and a share of the profits distributed as [[dividends]]. However, ownership also comes with risks. If the company performs poorly or goes into [[bankruptcy]], you could lose your entire investment. Unlike a lender, you have no guaranteed return, and you're the last one in line to get paid if things go south. This combination of risk and reward is what makes common stocks such a fascinating and powerful tool for building wealth over the long term. ===== The Rights and Realities of Ownership ===== Owning a common stock isn't a passive affair; it comes with specific rights that empower you as a part-owner, or [[shareholder]]. But these rights come with some important realities you must understand. ==== Your Rights as a Shareholder ==== Think of these as your shareholder superpowers. While one small investor can't usually change a company's direction alone, collectively, these rights are the foundation of corporate governance. * **Voting Rights:** This is your say in the company's future. Typically, each share gets one vote on major corporate matters, including electing the [[board of directors]] who oversee the company's management. You get to vote, even if you can't attend the annual meeting, through a proxy ballot. * **Claim on Profits:** If the company is profitable, the board may decide to distribute some of those earnings to shareholders in the form of dividends. While never guaranteed, a history of consistent dividends can be a sign of a healthy, stable business. * **Claim on Assets:** If a company is forced to close its doors and sell everything off (a process called [[liquidation]]), common stockholders have a right to a proportional share of the remaining assets. //However, and this is a big "however," you are last in line//. The company must first pay off all its debts to [[creditors]] and its obligations to owners of [[preferred stocks]]. * **Right to Information:** You have the right to inspect the company's books and records, including annual reports that detail its financial health. ==== The Reality Check ==== Your claim is //residual//. This means you get what’s left over. If the business thrives, the leftovers can be enormous. If the business fails, the leftovers can be, and often are, zero. This high-risk, high-reward dynamic is the essence of common stock investing. ===== A Value Investor's Perspective ===== To a value investor, a stock is not a flickering price on a screen; it's a piece of a living, breathing business. This mindset, championed by legends like [[Benjamin Graham]] and [[Warren Buffett]], transforms how you approach common stocks. ==== You're Buying a Business, Not a Lottery Ticket ==== The core philosophy of [[value investing]] is to analyze the business behind the stock. You should ask questions like: * Is this a durable business with a long-term competitive advantage? * Is the management team competent and honest? * What are its long-term earnings prospects? Answering these questions helps you estimate a company's true underlying worth, or [[intrinsic value]]. The goal is to buy the stock for less than that value. This is investing. Simply buying a stock because you hope its price will go up, without any analysis of the business, is pure [[speculation]]. ==== The All-Important "Margin of Safety" ==== The secret sauce for a value investor is the [[margin of safety]]. This is the discount between the price you pay for a stock and your estimate of its intrinsic value. For example, if you determine a business is worth $50 per share and you can buy it for $30, you have a $20 margin of safety. Why is this so crucial? - **It protects you from bad luck:** Business and markets are unpredictable. A margin of safety gives you a cushion if things don't go as planned. - **It protects you from your own errors:** Nobody is perfect. Your valuation might be too optimistic. A large margin of safety makes your investment resilient to your own mistakes. ===== Risks vs. Rewards: The Two-Sided Coin ===== Common stocks offer the highest potential returns of nearly all major [[asset classes]] over the long run, but they also carry significant risk. ==== The Glorious Upside ==== The reward for taking on the risk of ownership is the potential for substantial growth. If you pick a great company and its earnings grow over many years, the value of your ownership stake can multiply many times over. This power of compounding is how many of the world's greatest fortunes have been built. ==== The Sobering Downside ==== The primary risk is [[volatility]], or the tendency for stock prices to swing up and down, sometimes wildly. This is driven by everything from economic news to investor sentiment and is a normal part of [[market risk]]. The more permanent risk is losing your entire investment if the business fails. This is why thorough research and a margin of safety are not just academic concepts—they are your best defense against permanent capital loss.