Common shares are issued to business owners and other investors as proof of the money they have paid into a company. Of all shareholders, common shareholders have the least claim on a company’s assets.
Common shares make up one part of a company’s shareholder equity, which also includes any preferred shares that have been issued as well as any retained earnings.
Owners of common and preferred shares are typically compensated with dividends (money paid to them out of the company’s earnings after tax in return for using their capital). Common shareholders are paid dividends after preferred shareholders. In the event that a company needs to sell off its assets, common shareholders are not paid until all creditors have been satisfied and the preferred shareholders have been reimbursed.
Because shares are unsecured investments, a company is not required to repay shareholders for their original investment unless it legally declares that it will.
More about common shares
Both common and preferred shares appear under shareholders’ equity on the balance sheet, as shown in the sample below:
