Common Stock

Common stock is the most basic form of equity ownership. Each share represents a proportionate ownership stake in the corporation.

Domestic Common Stock

Represents ownership (equity) in a corporation
Shareholders are residual owners - last in line for assets in liquidation (after all creditors and preferred stockholders)
Limited liability - maximum loss is the amount invested
Returns come from dividends (if declared by the board) and capital appreciation
Unlimited upside potential; downside limited to total investment
Common stock is the most junior security in a corporation's capital structure

Think of it this way: Common stockholders are the last in line at the buffet. Creditors eat first, then bondholders, then preferred stockholders. Whatever is left goes to common stockholders. That is residual claim. The tradeoff is unlimited upside: there is no cap on how high the stock price can go.

Key Rights of Common Stockholders

Voting rights - elect the board of directors and vote on major corporate actions (mergers, stock splits, issuing new shares)
Preemptive rights (antidilution) - right to purchase new shares before the public to maintain proportional ownership (only if granted in the articles of incorporation)
Right to inspect corporate books and records
Right to transfer shares (sell, gift, or bequeath)
Right to receive dividends IF declared by the board (no guaranteed right to dividends)
Residual claim on assets in liquidation (after all debts and preferred stock are satisfied)

Voting Methods

Method	How It Works	Who Benefits
Statutory (regular)	One vote per share, per director seat	Majority shareholders
Cumulative	Total votes (shares x seats) can be allocated to any candidate(s)	Minority shareholders

Proxy - written authorization allowing another party to vote on behalf of a shareholder
Proxy solicitation is regulated by the SEC under the Securities Exchange Act of 1934

Exam Tip: Gotchas

Cumulative voting benefits minority shareholders because they can concentrate all votes on a single board candidate. The exam may describe a voting scenario and ask which method gives a small shareholder the best chance of electing a director.

Common stock dividends are never guaranteed. The board of directors must declare them.

Limited liability means you can only lose what you invested. Common stockholders cannot be sued for corporate debts beyond their investment.

Foreign Common Stock

Shares of companies incorporated outside the United States:

May trade on foreign exchanges in foreign currencies
Subject to currency (exchange rate) risk - fluctuations in exchange rates affect returns when converted back to U.S. dollars
Subject to political/sovereign risk - changes in foreign government policy, instability, or expropriation
Foreign tax withholding - foreign governments may withhold taxes on dividends paid to U.S. investors
U.S. investors may claim a foreign tax credit on their U.S. tax return to avoid double taxation
Requires currency conversion for purchase, dividends, and sale proceeds

Exam Tip: Gotchas

Currency risk applies even when the company performs well. If the U.S. dollar strengthens against the foreign currency, the investor's returns decrease when converted back to dollars, even if the stock price rose in local currency terms.

American Depositary Receipts (ADRs)

Certificates issued by a U.S. depositary bank representing shares of a foreign company. ADRs allow U.S. investors to invest in foreign companies without using foreign exchanges or foreign brokers.

ADR Characteristics

Trade on U.S. exchanges or over-the-counter (OTC) markets in U.S. dollars
Dividends paid in U.S. dollars (the depositary bank converts from the foreign currency)
ADRs do NOT eliminate currency risk - the underlying foreign shares are still denominated in a foreign currency
Subject to all the same risks as direct foreign stock ownership: currency risk, political risk, foreign tax withholding
Foreign governments may still withhold taxes on dividends, and the investor can claim a foreign tax credit

Think of it this way: An ADR is like a window into a foreign stock market. You buy and sell in dollars, but behind the glass, the actual shares sit in a foreign country priced in a foreign currency. If that currency weakens against the dollar, your ADR loses value even if the foreign stock price stays flat.

Feature	Sponsored	Unsponsored
Issuer involvement	Foreign company cooperates with the depositary bank	Created without the foreign company's involvement or consent
Where traded	May be listed on major U.S. exchanges (NYSE, Nasdaq)	Trade OTC only
SEC reporting	Foreign company provides financial reports	Limited or no reporting to SEC
Investor protection	Higher - company participates	Lower - no issuer involvement