A common stock is a security unit that represents a share of ownership in a corporation. The owners of common stock exercise their control over the corporation by electing its board of directors on a pro rata basis.
Holders of common stock are the last to receive their share of remaining corporate assets in the event of a liquidation, after bondholders and creditors have been paid.
The Purpose of Common Stock
Common stock makes up the largest share of the equity market, and is what most investors imagine when they think of the terms ‘stocks’ or ‘shares’. Common stock offers a degree of ownership and control over a corporation that investors have come to prize.
Common stock offers some of the best returns in the investing world. While any one company’s common stock may perform well or poorly at any one time, when taken as whole over many decades common stock offers strong performance that few other assets or types of securities can match.
The drawback to common stock performance compared to their traditional rival of bonds is that bondholders are placed before the holders of common stock in the event of a company liquidation.
Trading Common Stock
The vast majority of the shares that a day trader will deal with in the equity market will be common stock. Therefore, the vast majority of equity day trading strategies are geared toward common stock trading, with the expectation that the standard features of common stock will have a normalized impact on the performance of all such shares.
By contrast, shares that confer other forms of ownership and voting rights may display alternate performances as a result of internal corporate structure events, much of which may be beyond the comfort zone of a traditional day trader.
While alternate share types beyond common stock represent additional alternate trading opportunities, these opportunities can be different from what day traders are accustomed to, and they should familiarize themselves with these alternate share structures before attempting to apply existing day trading strategies.
Day traders are generally not concerned with the ownership rights that accompany common stock. Unlike long term value investors, day traders are not looking influence or alter the structure or management of a company to profit from its long term growth, but rather to profit from short term events, such as earnings announcements, or general price action.
The Growth of Alternatives to Common Stock
A growing number of companies are foregoing the issuance of traditional common stock for the alternative of shares that offer a much lessened degree of ownership and oversight.
This new custom is particularly prevalent in the technology sector, where company owners argue that the complex technical matters involved mean that they need to retain a strong degree of control over the direction of their company.
So far the markets have been accommodating of this new trend of lessened investor control, but it is still too early to tell if the lessened degree of public oversight will end up being an advantage or a disadvantage.
However, these shares should be treated with an extra degree of caution, as most market participants treat them as if they were traditional common stock shares when they are not.
If this new trend proves to be shortsighted, then these companies may undergo disruptive equity restructuring that could drastically impact the value of these sorts of shares.
Final Thoughts
Common stock is the traditional boiler-plate form of share issuance that has proven to be a very effective and reliable means for raising capital and governing publicly-traded companies.
The vast majority of the equity market is dominated by this type of share, and most trading strategies are based on the assumption that common stock is being traded.
However, there is a growing trend of alternatives to common stock being issued in the equity market, which represents both a need for caution by day traders looking to trade these shares and a whole new range of potential trading opportunities.
It is important for day traders to understand the traditional roles of ownership and control that common stock confer, and how they have shaped contemporary markets. That way day traders will understand how these new alternatives to common stock can impact their price performance in the market.