X
Common Stocks: Definition, Benefits, Risks and How to Buy Them
By Hiren Amin, Read bio | Updated on July 27, 2026
Get started with TD EasyTrade™
Get started with TD Direct Investing
Summary
Common stocks, also called common shares, represent partial ownership in a company. They can give investors the potential to earn returns through share price growth, dividends and voting rights. But they also come with risk, including market volatility and the possibility of losing money if a company performs poorly. Before buying common stocks, it’s important to research the company, understand your risk tolerance and consider how the investment fits your overall portfolio.
Common stocks, or common shares, represent an ownership stake in a given company. When you buy common stock, you’re actually buying a small part of a company. As a part owner, you may be entitled to certain benefits such as a share of company profits, and a say in certain company decisions. Common stocks are the most common type of stock traded on the stock market.
This article will help investors understand what common stocks are, how they work, and how to add them to your investment portfolio.
Common stocks in human terms
Buying common stock is like buying a small piece of a company. If the company grows and becomes more valuable, your shares may become more valuable too. If the company faces challenges, your shares may lose value. You may also receive dividends or get to vote on certain company decisions, but neither is guaranteed.
What are common stocks and how do they work?
Definition and characteristics of common stocks
Common stocks represent ownership shares in a company. When you buy common stocks, you’re actually buying a small part of the company that issued it. As an owner, you could be entitled to certain benefits, like voting rights and shares of the company’s profits. And if the company does well, and the value of the stock goes up, you’ll be able to sell your stock for a profit.
TAKE NOTE
Common stocks can offer growth potential, but they are not guaranteed investments. Their value can rise or fall based on company performance, market conditions and investor sentiment. Dividends and voting rights may also vary depending on the company and share structure.
Importance of common stocks as a type of investment
Some companies share their profits with common stockholders through dividend payments, which could be monthly, quarterly, semi-annual, or annual, with the vast majority of dividend payments being quarterly. Some companies share profits with shareholders through dividend payments, although dividends are never guaranteed. Companies may choose to reinvest profits back into the business instead of paying dividends. In addition, common stockholders will only receive dividend payments after dividends are paid to preferred stockholders. Investors can also choose to automatically reinvest dividends through a Dividend Reinvestment Plan (DRIP), which you can learn about here.
Depending on the type of common stock you own, you may also get a vote in certain company decisions. Common stockholders often get to vote in the election of a company’s board of directors. You may also get to vote on changes to company policies and major decisions like mergers and acquisitions.
Differences between common stocks and preferred stocks
Preferred stocks are another type of ownership share. As the name suggests, preferred stockholders receive certain benefits that common stockholders don’t.
Preferred shareholders are typically paid dividends before common shareholders and may receive priority claim on assets/earnings if a company is liquidated. However, preferred shares usually do not come with voting rights.
Preferred shares may pay fixed or floating dividends, depending on the share structure.
As the value of common stocks is tied to business performance, they tend to offer higher returns in the long run compared to preferred stocks, if the company performs well. At the same time, common stocks are also considered riskier because of their tendency to fluctuate in value. Preferred stocks are less volatile, may get fixed or floating rate dividend payments and higher priority for other payments over common stocks, and as a result, they are considered lower risk investments than common stocks.
Common stock VS Preferred stock
While both common and preferred stocks represent ownership in a company, they offer different advantages, risks and investor benefits.
| Feature | Common stock | Preferred stock |
| Ownership | Represents ownership in a company | Also represents ownership in a company |
| Voting rights | Often includes voting rights | Usually no voting rights |
| Dividends | May receive dividends, but not guaranteed | Often receives fixed or floating dividends |
| Payment priority | Paid after preferred shareholders | Paid before common shareholders |
| Risk level | Higher risk | Lower Risk |
| Volatility | Higher volatility | Lower volatility |
| Growth potential | Higher potential for long-term growth | Usually more income-focused |
Understanding these differences can help investors choose the type of stock that best aligns with their investment goals and risk tolerance.
Benefits of investing in common stocks
There are several benefits of investing in common stocks.
Growth potalenti: Common stocks may increase in value over time, offering the potential for capital gains.
Dividend income: Some companies pay dividends to shareholders.
Voting rights: Shareholders may be able to vote on certain company decisions.
Liquidity: Stocks can typically be bought and sold easily on public markets.
Risks of investing in common stocks
Market volatility: Stock prices can rise and fall based on company performance, investor sentiment and market conditions.
Potential losses: If a company performs poorly or goes bankrupt, investors could lose some or all of their investment.
Dividend uncertainty: Companies are not required to pay dividends and may reduce or stop payments at any time.
Factors to consider when investing in common stocks
Consider these factors when deciding which common stocks to invest in.
Company Performance
A number of factors affect the value of a company’s stock, including:
- Current earnings and profits
- Forecasted earnings and profits
- Dividends paid to shareholders
- New products being released, or existing products being recalled
- Potential mergers or takeovers
- Changes in management and staffing levels
- Scandals or bad press
Valuation ratios
Certain ratios can be used to assess a company’s performance and compare the value of common stocks:
-
Price-to-earnings ratio (P/E ratio): A quick way to determine whether a stock may be over or undervalued. The P/E ratio is calculated by dividing the current price of a share by its earnings per share (EPS).
-
Price-to-book ratio (P/B ratio): A company’s P/B ratio is calculated by dividing the price of the stock by its book value per share (BVPS). A low P/B ratio may be a sign that a stock is undervalued.
-
Price/earnings to growth ratio (PEG - ratio): One of the only valuation metrics that considers a company’s earnings growth rate when determining its value. You can calculate the PEG ratio by dividing a company’s P/E ratio by its expected annual EPS growth rate.
-
Dividend yield: Is calculated by dividing how much a company pays shareholders per share by the stock’s price. Dividend yields are expressed as a percentage of a stock’s current price. If a stock costs $50 per share, and pays an annual dividend of $2 per share, the annual dividend yield is 4%.
Industry trends
Industry trends can affect a company’s stock price positively or negatively.
If demand for a certain product goes up, the stock price of all companies making that product could go up as well. Conversely, if demand for that product goes down, that can negatively affect all companies in the industry as well.
Changes in individual companies within an industry can affect other companies too. For example, if one company in an industry stops producing a given product, its stock price may go down, while the price of a competitor’s stock may rise.
Economic factors
Economic changes can have a significant effect on stock prices. If the economy is expected to grow, investors may be more likely to buy common stocks in the hopes that their value will increase.
If the economy is expected to shrink, investors may be more likely to sell stocks out of fear that their value will drop.
Specific economic factors affecting the price of common stocks include:
-
Interest rates: Interest rates are controlled by the Bank of Canada. The Bank of Canada may lower interest rates to stimulate the economy and raise interest rates to slow inflation. The higher interest rates are, the more expensive it is for a company to borrow money and pay off debt. That can reduce growth and profits and cause stock prices to level out or fall.
-
Inflation/deflation: Inflation occurs when consumer prices go up. If inflation gets too high, the Bank of Canada may raise interest rates to encourage saving and discourage spending. Deflation occurs when prices begin to drop. If prices drop to fast, the Bank of Canada may lower interest rates to encourage increased borrowing and spending.
Economic policies and political shocks
Changes in governments can lead to changes in economic policies.
Policy changes that are seen as being good for business or a specific industry may help increase the value of a company’s stock. Policy changes that are considered bad for a given business or industry may reduce the value of a company’s stock and its associated price.
How to buy a common stock
Where do I start:
Step 1 – select an online broker
One of the easiest ways to buy common stocks is through an online broker. Look for an online broker that offers a range of tools and an easy-to-use trading platform.
Step 2 – choose an account
Common stocks can be purchased and held within a number of accounts, including a Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), cash or margin account.
Step 3 – research the company(s) you want to invest in
Research companies before investing and use available educational tools and resources to support informed investment decisions.
Step 4 – place the trade
Once you’ve done your research and decided on which stocks to buy, just place your order. It’s really that simple.
For more details on each of these steps, check out this article on how to buy stocks.
Frequently Asked Questions
How do I research and choose which common stocks to invest in?
If you are considering investing in common stocks, you should carefully review some key factors:
-
Learn more about the companies you’re thinking of investing in.
-
Review their financial statements and any other information you can find.
-
Compare stocks from a number of different companies within the same industry to understand which companies may be performing well.
-
Some brokerage tools, such as, TD Direct Investing’s, help make it easy to research companies within different sectors. You can also sign up for master classes, webinars and leverage other educational resources to build your investing knowledge.
How do I know when to buy or sell common stocks?
There’s no guaranteed way to time the market. Many investors base buy and sell decisions on company fundamentals, valuation and their long-term investment goals.
What are dividends and how do they work with common stocks?
Payments paid by companies to their shareholders are called dividends. Dividends are paid based on the number of shares you own. Companies pay dividends when they have excess profits beyond what is being reinvested back into the company.
How do taxes affect my investments in common stocks?
That will largely depend on the type of account you use. You won’t pay tax on any earnings held within a RRSP until you withdraw it. All withdrawals, including investment gains held within a TFSA are entirely tax-free. If you use a non-registered account, you’ll have to pay capital gains tax on any income earned.
Can I lose all my money investing in common stocks?
Investing in common stocks is never risk free. If the company that issued the stock goes bankrupt, you could lose your investment. Companies that go bankrupt will only make payments to common stockholders after creditors and preferred stockholders have been paid.
How long should I hold onto my common stock investments?
That will depend on your particular savings goals. Regardless of what your goals are, it’s important to monitor your investments and adjust your investment portfolio as necessary.
Why is common stock a form of equity?
When you buy a stock, you’re buying a piece of a company. That ownership gives you equity in the value of the company.
Are common stocks the same as common shares?
Yes. Common stocks and common shares generally refer to the same thing: ownership shares in a company.
Do all common stocks pay dividends?
No. Some companies pay dividends, while others reinvest profits back into the business. Dividends are never guaranteed.
Are common stocks good for beginners?
They can be, but beginners should understand the risks first. Common stocks can rise or fall in value, so it’s important to research each investment and think about your goals, timeline and risk tolerance.
What happens to common shareholders if a company goes bankrupt?
Common shareholders are usually last in line to be paid. Creditors, bondholders and preferred shareholders are typically paid first.
Conclusion
Common stocks can play an important role in a self-directed investment portfolio. They offer the potential for long-term growth, dividend income and voting rights, but they also come with risks that investors should understand before buying.
TD Direct Investing, provides tools, platforms and educational resources to help self-directed investors research and trade common stocks with confidence.
Share this article
Related Articles
View our learning centre to see how we're ready to help.
