Background
Common stock represents the equity capital of a US corporation that confers specific rights to its holders, including voting, dividend entitlement, and residual claim on assets.
Historical Context
The concept of common stock has evolved over centuries as corporations sought ways to raise capital by offering ownership stakes while providing investors varying degrees of control and financial benefits. Emerging prominently during the industrial revolution, common stock allowed entrepreneurs to secure funding from a broad base of investors.
Definitions and Concepts
Common stockholders exist as part-owners of a corporation, bearing certain rights and potential claims. This stock type is distinguished from preferred stock by its lower claim on assets and earnings, but higher participation in corporate governance through voting rights.
Major Analytical Frameworks
Classical Economics
Classical economists didn’t explicitly focus on stock markets but emphasized the role of private property and capital accumulation, indirectly linking to the concept of common stock as a capital raising mechanism.
Neoclassical Economics
Neoclassical economists explore how common stock prices reflect the underlying value through supply and demand mechanisms, influenced by investor expectations and corporate performance.
Keynesian Economics
Keynes emphasized investor behavior in stock markets, suggesting that shareholder sentiments and “animal spirits” can lead to market fluctuations, affecting the valuation of common stock.
Marxian Economics
Marx critique ownership structures, seeing common stock as an extension of capitalist enterprise, where returns to stockholders constitute a form of surplus value drawn from labor exploitation.
Institutional Economics
Institutionalists investigate how legal frameworks, corporate governance, and market institutions shape the issuance and performance of common stocks in fostering or impeding economic activities.
Behavioral Economics
Behavioral economists delve into psychological factors driving investor decisions in common stocks, highlighting biases and heuristics that deviate from rational market behavior.
Post-Keynesian Economics
This perspective emphasizes the real effects of stock market fluctuations on economic instability, with common stock valuations influencing corporate investment decisions.
Austrian Economics
Austrians point to the investor as an entrepreneur, assessing the subjective value of common stock against expected future returns and market conditions.
Development Economics
Within development economics, the growth of stock markets, including common stock trading, is seen as pivotal for economic development by mobilizing savings for productive investments.
Monetarism
Monetarists examine the role of monetary policy in influencing stock market valuations, including the performance and pricing of common stocks through interest rates and inflation control.
Comparative Analysis
Common stock is similar to ordinary shares in UK companies. However, variations exist in shareholders’ rights, including specific voting powers and dividend policies influenced by differing regulatory environments.
Case Studies
- The rise and fall of tech companies during the dot-com bubble demonstrate how speculative investments inflating common stocks can lead to substantial market volatility.
- The financial crisis of 2008 highlights the risks inherent in corporate governance and common stock valuation under systemic economic distress.
Suggested Books for Further Studies
- The Intelligent Investor by Benjamin Graham
- Security Analysis by Benjamin Graham and David Dodd
- Common Stocks and Uncommon Profits by Philip Fisher
Related Terms with Definitions
- Preferred Stock: A type of equity that typically provides dividends before common stockholders and has a higher claim on assets.
- Dividend: A distribution of a portion of a company’s earnings issued to shareholders.
- Voting Rights: The rights that allow common shareholders to vote on corporate matters, typically in proportion to their investment.
- Residual Assets: Assets remaining after all liabilities and obligations have been satisfied during the liquidation of a corporation.
