Common Stockholder

A common stockholder (also known as a 'shareholder' or 'equity holder') is a person or entity that owns shares of common stock in a corporation. Think of them as the true, albeit partial, owners of the business. When you buy a share of a company like Apple or Coca-Cola, you become a common stockholder. This ownership stake grants you a claim on the company's profits and a say in how it's run. However, this ownership also comes with significant risk. In the grand hierarchy of a company's capital structure, the common stockholder is last in line. If the company faces financial trouble and has to liquidate, creditors, bondholders, and preferred stockholders all get paid back before the common stockholder sees a single cent. This “last but not least” position means they enjoy the greatest potential rewards if the business thrives but also bear the greatest risk if it fails.

Being a common stockholder is a classic tale of risk and reward. You're not just a passenger along for the ride; you're part of the crew with a vested interest in the ship reaching its destination and discovering treasure.

As a part-owner, you are entitled to share in the company's success. This typically happens in two main ways:

• Capital Appreciation: If the business performs well and its value grows, the price of your stock will likely increase. You can then sell your shares for more than you paid, realizing a capital gain. This is the primary way most stockholders hope to profit.
• Dividends: Profitable companies often distribute a portion of their earnings to stockholders in the form of dividends. While not guaranteed, these regular payments can provide a steady stream of income.
• Voting Rights: You have the right to vote on major corporate matters. This includes electing the board of directors, who oversee the company's management, and approving significant actions like mergers. While one small stockholder's vote may seem insignificant, collectively, stockholders wield the ultimate power over the company's direction.

The biggest risk for a common stockholder stems from their position as a residual claimant. This means they only have a right to what’s left over after all other obligations have been met. In the unfortunate event of a bankruptcy, the company's assets are sold off to pay its debts in a specific order of priority. The common stockholder is at the very bottom of this list, getting paid only after:

1. Secured and unsecured creditors (banks, suppliers)
2. Bondholders
3. Preferred stockholders

In many liquidations, there is nothing left for the common stockholders, and their investment becomes worthless. This is the stark reality of the risk they undertake for the potential of unlimited upside.

To a value investor, being a common stockholder isn't about betting on squiggly lines on a chart; it's about becoming a part-owner in a wonderful business. The legendary investor Warren Buffett, a student of Benjamin Graham, emphasizes that one should “buy a stock the way you would buy a house.” You're not just buying a piece of paper; you're buying a tangible piece of a business enterprise. From this viewpoint, the goal is to purchase your ownership stake for a price significantly below its calculated intrinsic value. This discount, which Graham famously called the margin of safety, is the value investor's primary defense against risk. It provides a cushion against errors in judgment, bad luck, or the inevitable volatility of the stock market. By thinking like a business owner and demanding a margin of safety, the prudent common stockholder can embrace the potential rewards of ownership while diligently protecting themselves from the inherent risks of being last in line.

It's crucial to understand the difference between a common stockholder and a preferred stockholder, as their rights and expectations are quite different.

• Voting Power: Common stockholders almost always have voting rights. Preferred stockholders typically do not.
• Dividends: Preferred stockholders are usually promised a fixed, regular dividend. Common stock dividends are variable and are only paid after the preferred stockholders have received their share.
• Claim on Assets: In a liquidation, preferred stockholders get paid back before common stockholders. This makes their position less risky, but it also limits their potential for massive gains, as their return is generally capped at the fixed dividend rate.