There are many different types of instruments an emerging business may issue to finance its growth. Although there are certain exceptions, debt instruments generally represent fixed obligations to repay a specific amount at a specified date in the future, together with interest. In contrast, equity instruments generally represent ownership interests entitled to dividend payments, when declared, but with no specific right to a return on capital. Within each of these two general categories, there are a wide variety of rights, privileges, and limitations that may be established by the issuing company.
Common stock is the most basic form of equity instrument.
It represents an ownership interest in a corporation, including an interest in earnings, that translate into declared dividends, as well as an interest in assets distributed upon dissolution. Common stock may be voting or non-voting and may be divided into classes with special voting privileges assigned to each class. However, common stock is typically entitled to full voting rights, i.e., the right to cast a vote in the election of directors of the corporation. Holders of common stock have the greatest opportunity to share in a company's profitability because of the unlimited potential for dividends, appreciation in the value of their common stock, and realization of liquidation proceeds. However, common stock holders also bear the greatest risk of loss because they are generally subordinate to all other creditors and preferred stock holders.