What is common stock?
Common stock is a simple form is an equity investment that represents ownership in a corporation. Each share of common stock represents a fractional ownership interest in the firm. For example, if you buy 1 share of common stock in a corporation that has 10,000 shares outstanding, you would be a 1/10,000th owner in the firm. Today, roughly half of all U.S. households own some common stock, either as direct investors or indirectly through a broker or financial institution.
The return on investment in common stock comes from two sources: dividends and capital gains.
- Dividends are payments corporation makes to its shareholders. Companies are not required to pay dividends to their shareholders, and most firms that are small or are growing very rapidly do not pay dividends. As firms grow and accumulate cash, they often start paying dividends. Companies that pay dividends usually pay them quarterly but there are some that will pay on an annual basis.
- Capital gains occur when the stock price rises above an investor’s initial purchase price. Capital gains may be realized or unrealized. How do you tell the difference? If you sell a stock for more than you paid for it, you have realized a capital gain. If you continue to hold the stock rather than sell it, you have an unrealized capital gain.
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