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What Is the Relationship between Capital Stock and Common Stock?

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  • Written By: Felicia Dye
  • Edited By: O. Wallace
  • Last Modified Date: 28 January 2020
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    Conjecture Corporation
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Capital stock and common stock both refer to shares in a company. These terms are related, but they generally are not synonymous. There may be an exception if a stock certificate is issued for capital stock without any further designation. Otherwise, capital stock is a term is generally used to refer collectively to two types of shares — preferred and common.

To understand the relationships between capital stock and common stock, it is necessary to comprehend that shares issued by a company may not be the same. It is common for companies to have several types, or classes, of shares. This is done because each class generally grants the shareholders different rights.

Capital stock is a term that refers to all of the shares in two popular classes — common stock and preferred stock. It is, therefore, accurate to say that common shares are a type of capital stock. It is also accurate to state that common stock is generally the most popular type of capital stock.

Common stock refers to a class of shares that offer shareholders the opportunity for capital appreciation. This means that when the company becomes more valuable, each share that an individual holds also becomes more valuable. If a company is valuable enough, these shareholders commonly earn dividends, which are usually cash payments from a portion of the profits. Common stock shareholders are also granted voting rights that allow them to participate in making certain company decisions.

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The other class of capital stock is preferred stock. Owning these types of shares generally offers a shareholder less profit potential, but it also provides more stability. Preferred shareholders are guaranteed dividends regardless of profits or losses. In the event of a company's bankruptcy, holding preferred stock entitle an individual to payment before common shareholders are paid.

A company's balance sheet generally includes information about its share activity, including the value and the number authorized for issuance compared to the amount actually sold. Without the broad classification of capital stock, preferred and common stock may need to addressed individually. In most cases, however, the task is simplified by grouping them together.

The relationship between capital stock and common stock can get more complicated, however. There may be instances when a stock certificate is issued that simply says “capital stock.” In this situation, since a class is not specified, the certificate is generally considered to refer to common stock. Although capital stock and common stock are synonymous in this case, it would be misleading to use these terms interchangeably for general purposes.

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