The common stock represents an ownership claim that has a par value, book value, and market value. The par value is shown on the stock certificate. The book value represents owner-equity that does not include preferred shares, but includes reserves, retained earnings, and capital surplus in addition to the par value of the stock divided by the number of outstanding shares. Finally, the market value represents the price at which the stock is sold in the capital market, and may be higher or lower than the book value. Market participants know that the par value and the book value do not represent the intrinsic value of the stock.

This is because the intrinsic value of the common stock is its market value that depends on the expected return that is resulted from the capital gains and dividends. The common stockholder is not allowed to return the common stock for the company to reclaim its value. If the investor has to sell the stock, the only venue available is the stock market. In case of bankruptcy there is no guarantee that the investor will get the purchase price of the stock, and may get nothing. In addition, the investor is not entitled for dividends if the management does not decide to distribute profits.

However, the common stockholder has many rights not available to other claimants. The investor is entitled to sell or donate the stock, and to receive proportionate share of dividends, whether cash or stock dividends. In case of stock dividends, the investor share is determined by his ownership of the company stock.

Since stock dividends increase the number of outstanding shares, without a corresponding increase in the company’s earning power in the short-run, the market value of owners equity remains constant, and the market value per share decreases.

It should be noted that companies usually issue stock dividends to stop sharp increases in market value of the stock.

Other shareholders rights include the right to vote in shareholders meetings. The investor’s ability to influence decisions depends on the number of shares owned. Usually an investor signs a proxy authorizing a member of the board of directors to vote on his/her behalf. Such action tends to deprive the investor from direct participation in running the company’s affairs.

From the firm’s view, common stocks represent a permanent source of financing, since they are not redeemable and the company is under no obligation to issue dividends, even in profitable years. This is in addition to the fact that issuance of more common shares reduces the ratio of debt in the company’s capital structure. This increases the debt capacity of the firm, i.e., it increases the firm’s ability to obtain debt when needed, other things remain constant.