Common stock is a share of ownership in a company, not a bank account
Common stock is not a type of bank account. It is a share of ownership in a corporation. When you buy common stock, you own a small piece of that company. You hold it in an investment account—usually through a brokerage firm like Fidelity, Charles Schwab, or Vanguard—not through a bank.
The confusion often happens because both bank accounts and investment accounts hold money and can be opened at financial institutions. But they work differently. A bank account is a place to store cash. Common stock is an asset you buy and sell, and its value changes every trading day based on what other investors will pay for it.
If you own common stock and the company pays dividends, you receive a share of the company's profits. If the company does well and more people want to buy its stock, the price goes up and you can sell for more than you paid. If the company struggles, the price falls and you could lose money.
Key Takeaways
- Common stock represents ownership in a company and is held in an investment account, not a bank account.
- The price of common stock changes daily based on supply and demand, so your investment value is not fixed.
- Common stockholders may receive dividends if the company pays them, and they can vote on major company decisions.
- You buy and sell common stock through a brokerage account, and the transaction takes one to two business days to settle.
- Common stock is riskier than bank savings because the company could fail and your shares could become worthless.
How you buy and sell common stock
To buy common stock, you open a brokerage account with a firm that buys and sells stocks on your behalf. You fund the account with cash (usually by bank transfer or check), then place an order to buy shares of a specific company. The order executes during market hours—typically 9:30 a.m. to 4 p.m. Eastern time on weekdays when the stock exchange is open.
When you sell, you place a sell order for the number of shares you own. The money lands in your brokerage account within one to two business days. You can then transfer that cash back to your bank account or use it to buy other stocks.
Most brokerages charge no commission to buy or sell stocks anymore, though some charge fees for certain types of orders or accounts. Check your brokerage's fee schedule before you open an account.
What rights come with owning common stock
Common stockholders have two main rights: voting and dividends. When a company holds a shareholder meeting to decide major issues—like electing the board of directors or approving a merger—common stockholders get one vote per share. If you own 100 shares, you have 100 votes.
Dividends are optional. Some companies pay a portion of their profits to shareholders each quarter or year. Others reinvest all profits back into the business and pay no dividend. The company's board decides whether to pay dividends and how much. If a company does pay dividends, you receive your share based on how many shares you own.
If a company goes bankrupt, common stockholders are last in line to receive any remaining assets. Creditors and bondholders get paid first. This is why common stock is riskier than bonds or bank savings.
The difference between common stock and preferred stock
Preferred stock is a different class of ownership. Preferred stockholders receive dividends before common stockholders do, and if the company fails, preferred stockholders get paid before common stockholders. In exchange, preferred stockholders usually cannot vote on company decisions and their shares do not typically increase in value the way common stock can.
Most individual investors buy common stock, not preferred stock. Preferred stock is more common in institutional portfolios or for investors seeking steady income rather than growth.
How common stock accounts are taxed
When you sell a stock for more than you paid, you owe capital gains tax on the profit. If you held the stock for more than one year before selling, the gain is taxed as a long-term capital gain, which usually has a lower tax rate than ordinary income. If you held it for one year or less, it is taxed as a short-term capital gain at your regular income tax rate.
Dividends are also taxable. may have access to dividends (from U.S. companies and held for a certain period) are taxed at the long-term capital gains rate. Non-may have access to dividends are taxed as ordinary income.
You do not owe tax on gains until you sell the stock. If the stock goes up in value but you do not sell, there is no tax due that year. This is why some investors hold stocks for many years—to delay taxes and potentially pay the lower long-term rate.
Where common stock fits in an investment strategy
Common stock is one piece of a diversified portfolio. Many investors hold a mix of stocks, bonds, and cash depending on their age, risk tolerance, and time horizon. Younger investors with decades until retirement often hold more stock because they have time to recover from short-term losses. Investors nearing retirement often hold less stock and more bonds or cash.
A common approach is to buy index funds or exchange-traded funds (ETFs) that hold many stocks at once, rather than picking individual companies. This spreads your risk across hundreds or thousands of companies instead of betting on a few.
What happens if the company fails
If a company goes bankrupt, your common stock can become worthless. The company's assets are sold, and the money goes to pay creditors first—banks, bondholders, employees owed wages. Common stockholders get whatever is left, which is often nothing.
This is the main risk of common stock. Unlike a bank account insured by the FDIC up to $250,000, there is no insurance on stock holdings. You can lose your entire investment if the company fails.
This is why diversification matters. If you own stock in 50 different companies and one fails, you lose only a small portion of your portfolio. If you own stock in only one company and it fails, you lose everything you invested in it.
Frequently Asked Questions
Can I lose more money than I invested in common stock?
No. The worst case is that the stock price falls to zero and your shares become worthless. You lose your entire investment but no more. You are not liable for the company's debts.
Do I have to hold common stock forever?
No. You can sell anytime the market is open. There is no minimum holding period, though selling within one year triggers short-term capital gains tax at a higher rate than long-term gains.
What is the difference between common stock and a mutual fund?
Common stock is one company's shares. A mutual fund is a pool of money from many investors used to buy stocks, bonds, or other assets. A mutual fund holds dozens or hundreds of individual stocks, so you own a piece of many companies with one purchase.
Can I buy common stock directly from the company?
Some companies offer direct stock purchase plans (DSPPs) that let you buy shares without a broker. However, most investors use a brokerage account because it is simpler and offers more flexibility to buy and sell quickly.
Is common stock the same as a stock option?
No. A stock option is a contract that gives you the right to buy or sell common stock at a set price by a certain date. Options are more complex and riskier than owning the stock itself. Most individual investors own common stock, not options.