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Common stock is the most subordinate class of shares of a reporting entity. The common shareholders generally profit the most when a reporting entity is successful and bear the greatest risk of loss when a reporting entity fails. Figure 4-1 summarizes some of the characteristics of common stock.
Figure FG 4-1
Characteristics of common stock
Feature
Overview
Liquidation preference
In the event of liquidation, common shareholders have an unsecured interest over the reporting entity’s residual net assets after satisfaction of all other claims and preferences and bear the ultimate risk of loss
Dividends
Dividends paid to common shareholders may vary from period to period and typically are not guaranteed
Voting
Typically, common shareholders control the voting power of a reporting entity
Term
Common stock typically has no redemption date
Par value
Most common stock has either no or minimal par value
In every corporation, one class of stock represents the basic ownership interest; that class is called common stock. However, in an effort to broaden investor appeal, corporations may offer two or more classes of common stock, each with different rights or privileges. Common stock can be issued in a variety of ways, including through an original capital infusion, an initial public offering, issuance of stock-based compensation, settlement of equity-linked instruments, and stock dividends.
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