Since the first shares changed hands in the early 17th century, stockholders have enjoyed distinct advantages compared to other types of investments. In addition to potential capital appreciation, shareholders may receive dividends and voting rights, all while maintaining limited liability. Yet, stocks have a downside as well. Knowing the advantages and disadvantages of being a shareholder prepares you for determining what types of stocks to invest in, and how much to invest in different asset classes.
According to Russell Investments, between 1959 and 2008 the Standard & Poor's 500 -- an index that represents the U.S. stock market -- returned 9.18 percent per year on average. Had you invested in bonds, your average return per year would have been 6.48 percent. Capital appreciation is one of the greatest lures for being a shareholder. Owning shares of a company lets you participate in the company's growth, and the rising stock price that comes with it. Not all stocks rise though, and companies -- even large ones -- can fail. Owning stock is more risky than owning bonds, which is why the long-term return on stocks is higher.
Many companies pay dividends -- a per-share payment sent to shareholders every three months. Dividends play a significant role in your overall return as a shareholder. From 1900 through 2011, the Dow Jones Industrial Average -- another index representing the U.S. stock market -- returned 9.4 percent per year on average. Only 4.8 percent of the gain came from price appreciation; the other 4.6 percent came from dividends. New companies, or companies that are growing rapidly, often don't pay dividends. Instead, the money is used within the company to fund expansion and hopefully increase the share price.
As a common stock shareholder you have the right to voice your concerns and be a part of major company decisions. Your voting privileges let you cast a vote, usually one for each share owned, on decisions such as director selection or whether the company should do any mergers, acquisitions or stock splits. Bondholders and preferred shareholders don't have voting rights. Small common-stock shareholders may have very little relative say in what the company decides to do, though. When company insiders, or large funds, own the majority of shares the company has issued, those groups will likely determine the outcome of the vote.
Common stock shareholders cannot be held liable for the actions of the company, or for any debts or illegal activities the company took part in. Investing in common stock limits your losses to the price you paid for the stock. When companies go bankrupt, though, you could lose most (or all) of your investment. As the company is dissolved and assets are sold, you may receive some of your investment back, but bondholders and preferred shareholders have first dibs on such monies.
- What Is the Difference Between Preferred Stock & Regular Stock?
- Outstanding Stock Vs. Authorized Stock
- What Are the Two Types of Return Common Stockholders Receive for Their Investment?
- How Dividends on Preferred Stock Affect the Computation of EPS
- Common Stock Funds
- Common Shares Vs. Preferred Shares
- What Is Shareholder Stock?
- What Determines Whether the Price of a Mutual Fund Goes Up?