Common stock represents ownership of a firm. Owners of the common stock of a firm share in the company’s successes and problems. If, like Wal-Mart Stores, Home Depot, Microsoft, or Intel, the company prospers, the investor receives high rates of return and can become wealthy.
In contrast, the investor can lose money if the firm does not do well or even goes bankrupt, as the once formidable K-Mart, Enron, W. T. Grant, and Interstate Department Stores all did. In these instances, the firm is forced to liquidate its assets and pay off all its creditors.
Notably, the firm’s preferred stockholders and common stock owners receive what is left, which is usually little or nothing. Investing in common stock entails all the advantages and disadvantages of ownership and is a relatively risky investment compared with fixed-income securities.
Common Stock Classifications
When considering an investment in common stock, people tend to divide the vast universe of stocks into categories based on general business lines and by industry within these business lines. The division includes broad classifications for industrial firms, utilities, transportation firms, and financial institutions. Within each of these broad classes are industries.
The most diverse industrial group includes such industries as automobiles, industrial machinery, chemicals, and beverages. Utilities include electrical power companies, gas suppliers, and the water industry. Transportation includes airlines, trucking firms, and railroads. Financial institutions include banks, savings and loans, insurance companies, and investment firms.
An alternative classification scheme might separate domestic (U.S.) and foreign common stocks. We avoid this division because the business line–industry breakdown is more appropriate and useful when constructing a diversified portfolio of global common stock investments.
With a global capital market, the focus of analysis should include all the companies in an industry viewed in a global setting. The point is, it is not relevant whether a major chemical firm is located in the United States or Germany, just as it is not releveant whether a computer firm is located in Michigan or California.
Therefore, when considering the automobile industry, it is necessary to go beyond pure U.S. auto firms like General Motors and Ford and consider auto firms from throughout the world, such as Honda Motors, Porsche, Daimler-Chrysler, Nissan, and Fiat.
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