What it means
For non-finance managers, understanding common shares is essential because they form the foundational equity of a business. When a company is started or expands, it often issues these shares to raise money from founders, employees, or external investors.
Because common shareholders are owners rather than lenders, they do not receive guaranteed interest payments. Instead, their financial return depends entirely on how well the business performs.
If the company grows and becomes profitable, share values typically rise, and dividends may be paid. Conversely, if the business struggles, share values can drop significantly.
Voting rights are a major feature of common shares. Usually, one share equals one vote at shareholder meetings, allowing owners to elect the board of directors and influence major corporate policies.
However, this ownership also comes with the highest level of risk. If a company goes bankrupt and enters liquidation, common shareholders are at the back of the queue.
All debts, taxes, and preferred shareholders must be paid off first. Only if money remains will common shareholders receive anything.
In day-to-day business management, keeping track of common shares is vital for calculating key financial metrics like earnings per share. Managers need to understand that issuing too many new shares dilutes existing ownership percentages, reducing each current shareholder's slice of the pie.
Balancing the need to raise capital through share issuance against protecting existing owner value is a central task for corporate leaders. Owning a common share is like owning a single brick in a large apartment building.
You own a tiny fraction of the whole property, you get a vote on building rules, and your property value rises or falls with the neighbourhood.
In practice
Real-world examples
Example 1
TechStart UK issues 10,000 common shares to launch its app. Founder Sarah holds 6,000 shares, giving her a 60% ownership stake and control over key company decisions. If the remaining 4,000 shares are split between two friends, any major vote still needs Sarah's support.
Example 2
Baker Street Bakery issues common shares to three long-term employees as a reward, giving them a direct financial stake in the shop's future. If each employee receives 2% of the shares, they share in dividends and in any increase in value when the bakery is eventually sold.
Example 3
Global Logistics PLC has millions of common shares traded publicly on the stock exchange, allowing everyday retail investors to buy tiny fractions of ownership in the massive fleet. A retail investor who buys 100 shares is an owner with a vote, although a very small one.
Think of it
Owning a common share is like owning a single brick in a large apartment building. You own a tiny fraction of the whole property, you get a vote on building rules, and your property value rises or falls with the neighbourhood.
Formula
Calculation
Earnings Per Share (EPS) = (Net Income - Preferred Dividends) / Number of Common Shares Outstanding
Ownership Percentage = Shares Held / Total Common Shares Outstanding
Worked example. A firm earns $100,000 of profit, pays no preferred dividends and has 50,000 common shares outstanding, so EPS = $100,000 / 50,000 = $2.00 per share.
An investor who holds 5,000 of those shares owns 5,000 / 50,000 = 10% of the company. If the firm then issues 10,000 new shares to raise cash, there are 60,000 shares outstanding. The investor's stake falls to 5,000 / 60,000 = about 8.33%, and unless profit rises, EPS falls to $100,000 / 60,000 = about $1.67. This is dilution, and it is why managers weigh the cost of issuing shares against the benefit of the cash raised.Case study
Seen in the real world
This is a fictional, illustrative scenario. Apex Design Ltd, a graphic design agency, was founded by two partners. To fund a new digital studio, they decided to incorporate and issue 100,000 common shares. They kept 70,000 shares for themselves and sold 30,000 shares to an angel investor for $150,000, which values the shares at $5 each.
Over the next three years, Apex Design grew rapidly, securing major corporate clients. The annual net profit reached $200,000, and the board declared a dividend of $1.00 per share. The angel investor received $30,000 in cash dividends that year. Due to the strong profit growth, an independent valuation priced the common shares at $10 each, meaning the founders' 70,000 shares were now nominally worth $700,000 and the investor's stake was worth $300,000, double the original $150,000.
Later, the partners raised $250,000 by issuing 25,000 new shares to a second investor at $10 each. That took the total to 125,000 shares, so the founders' stake fell from 70% to 56% and the angel's from 30% to 24%, while EPS on the same profit fell from $2.00 to $1.60. The case illustrates how common shares align financial rewards with business performance, reward early risk-taking and carry the cost of dilution.
Watch out
Common mistakes
- Assuming common shareholders are guaranteed a regular dividend payment.
- Confusing common shares with company debt or bonds that must be repaid.
- Failing to realise that issuing new shares reduces the ownership percentage of existing shareholders.
Questions
People also ask
Do all common shares carry voting rights?
Usually yes, but some companies issue different classes of common shares where certain classes have no voting rights or restricted votes.
What happens to my common shares if the company goes bust?
Common shareholders are last in line during liquidation, meaning you will likely lose your entire investment if debts exceed remaining assets.
How do common shareholders make money?
Through capital growth when the share price increases, and through dividend payments distributed from company profits.