Common Stocks A-Z

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Common stock is issued by certificates, each one of which indicates the number of shares and who owns them. In case of transfer, an assignment form on the back of the certificate must be filled out, witnessed, and forwarded to the company secretary or his assistant; the old certificate is canceled, and the stock then transferredto a new owner. A new certificate is then drawn up for the new stockholder.

Sometimes the common stock is divided into two classes: the voting stock (whose owners have a voice in the conduct of the business) and the nonvoting, whose owners share in all the risks of ownership without having any voice in the conduct of its affairs. The use of this latter form has now fallen into disfavor, since it is felt that one who assumes the full risks attendant upon ownership should also have some voice in the enterprise.

Originally all common stock had a stated or "par" value, based upon the premise that this represented the actual funds paid into the company treasury; actually, few stocks sell at their par value figure, the price depending entirely upon the net asset value and the ability of the company to show consistent earnings and dividends. As a result, many states permit the issue of "no par" shares, which are sold for whatever price they will bring upon the open market. For the buyer of stocks the par or the no par value of a given stock is of little consequence, since each share actually represents a fraction of the total net assets and earnings.

While the stockholders assume all the risks of ownership, there are certain legal restrictions placed upon the extent of such risks. In essence, this simply means that the stockholders cannot lose more than the amount paid for their stock. As a further restriction, most common stocks of this day carry a printed legend to the effect that they are "fully paid and nonassessable," which means that the corporation directors have no legal right to assess any additional amount against the individual shareholder to meet the needs of the corporation if it falls into financial distress.

Liability originally meant that all shareholders were actually held liable for the entire indebtedness of the corporation, but the experiences of the Great Depression of the thirties showed this to be a complete fiction, since it meant nothing to hold people responsible for debts, which could not be collected for lack of funds with which to pay them. Today the shareholders are only liable for the amount, which they have actually invested, and this rule is practically without exception.

It must be realized that the stockholder is not a lender to the corporation in which he has purchased shares, nor do the stockholders actually own the assets; each of them is a part owner in the business and, as such, shares in its success or failure. In the event of liquidation, he is entitled to a just amount derived from the conversion of assets after all other claims are satisfied; meanwhile the corporation is the sole owner of its assets, for that is the purpose for which it was originally created as a legal entity.

Stockholders do have a nominal voice in company operations, but it is important to remember that the board of such companies nearly always has a 51 percent "voice" in company decisions. Therefore it is important to invest in companies that you believe in and that you believe will remain solvent for years to come.

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