Common Stock: Real-Life Examples to Help You Understand
To truly understand common stock, let's dive right into some famous examples that have shaped industries, created millionaires, and changed the course of corporate history.
Apple Inc. (AAPL): From Near Bankruptcy to a Trillion-Dollar Giant
Apple is a household name today, but few remember that the company was on the verge of bankruptcy in the late 1990s. If you had purchased $1,000 worth of Apple stock in 2003, you would have seen it grow by thousands of percent as Apple became the first U.S. company to reach a market capitalization of over $1 trillion in 2018. This incredible growth was fueled by the company's innovation, spearheaded by its visionary CEO, Steve Jobs, and a series of iconic products like the iPod, iPhone, and iPad. Apple’s common stockholders reaped enormous benefits, with the stock appreciating by over 1,500% over a decade.
This success story highlights the potential long-term benefits of owning common stock, where stockholders are entitled to profits in the form of dividends and, most notably, capital appreciation as the stock price rises.
Tesla Inc. (TSLA): A Modern-Day Game-Changer
Tesla is another remarkable example of how common stock can lead to unimaginable wealth. Founded in 2003 by Elon Musk and a group of engineers, Tesla began as a niche electric car company. Those who believed in Tesla early on and invested in its common stock are now some of the most rewarded stockholders in history. As of 2023, Tesla's stock has increased by over 14,000% since its IPO in 2010.
But beyond the staggering returns, Tesla’s stock is an excellent illustration of the volatility and risk associated with common stocks. There were periods when the stock’s value fluctuated wildly due to concerns about production, competition, and Musk's unconventional leadership. However, those who held onto their shares were rewarded tremendously, showing that patience and belief in the company's mission can pay off in the long run.
Coca-Cola (KO): A Classic Example of Dividend Stability
Not every common stock story is about massive price growth. Coca-Cola is a more traditional example, representing the idea of steady, reliable returns through dividends. Founded in 1892, Coca-Cola has been a staple of the American stock market for over a century. Investors who own Coca-Cola's common stock may not experience the wild gains seen in tech companies like Tesla or Apple, but they do enjoy consistent dividend payments.
The company has been paying dividends to its shareholders for over 50 years, making it a favorite among income-focused investors. In 2022, Coca-Cola's dividend yield was around 3%, offering a steady income stream to stockholders. This showcases the value of common stocks for those looking for a balance between income and growth, especially in more established companies.
Amazon (AMZN): The Power of Patience
Amazon is another great example of how common stockholders can benefit from long-term investment. When Amazon went public in 1997, its stock price was just $18 per share. As of 2023, Amazon's stock price had risen to over $3,000 per share, making early investors incredibly wealthy. If you had invested $1,000 in Amazon at its IPO, your shares would now be worth millions.
But Amazon's stock price didn’t rise in a straight line. There were numerous points of doubt, including the dot-com crash of 2000 when Amazon's stock plummeted by 90%. Many investors lost faith, but those who held on reaped the rewards when Amazon pivoted from being an online bookstore to a global e-commerce and cloud computing giant. Amazon’s success story highlights the importance of holding onto common stock during tough times.
General Electric (GE): A Cautionary Tale
While many of the examples discussed so far have had positive outcomes, it’s important to recognize that owning common stock isn’t always a guarantee of success. General Electric (GE) is a sobering reminder of how even the most established companies can experience a downfall.
GE was once considered the gold standard of American companies. However, poor management decisions and a failure to adapt to a changing market led to a significant decline in the company’s stock price. From a high of nearly $60 per share in 2000, GE’s stock fell to below $10 by 2018, wiping out billions of dollars in shareholder value.
This example serves as a reminder that common stockholders bear the brunt of a company's downturn. If the company performs poorly, the stock price will fall, and shareholders could lose a significant portion of their investment.
Key Takeaways from These Examples
The above examples illustrate several key points about common stock:
Potential for Massive Returns: Companies like Apple, Tesla, and Amazon show the immense upside potential of common stock ownership. If you invest early in the right company, the returns can be life-changing.
Volatility and Risk: As seen with Tesla and Amazon, owning common stock can be a rollercoaster. Stock prices can fluctuate wildly, especially in the tech sector, but patience can pay off.
Steady Income: Coca-Cola shows that not all common stock investments are about high-risk, high-reward scenarios. Dividend-paying stocks provide a consistent income stream, which can be particularly appealing for long-term investors.
Downside Risk: General Electric serves as a cautionary tale. There are no guarantees when it comes to stock investments, and even once-great companies can fall from grace.
Common Stock vs. Preferred Stock
One of the key distinctions to understand in the stock market is the difference between common stock and preferred stock. While common stockholders typically have voting rights and the potential for unlimited upside in terms of capital gains, they are also the last to be paid in the event of a company's liquidation. Preferred stockholders, on the other hand, have a fixed dividend and are paid before common stockholders but do not enjoy the same potential for price appreciation.
Here’s a quick comparison:
| Feature | Common Stock | Preferred Stock |
|---|---|---|
| Voting Rights | Yes | No |
| Dividend Payments | Variable | Fixed |
| Claim in Liquidation | Last | First |
| Price Appreciation | Potentially Unlimited | Limited |
Conclusion
Investing in common stock can be both rewarding and risky. The potential for large capital gains is significant, especially when investing in high-growth companies like Apple, Tesla, or Amazon. However, as with any investment, there are risks, and not all stocks will perform as expected, as seen with General Electric.
The best approach for common stock investors is to diversify their portfolios, focus on long-term growth, and be prepared for volatility. By holding onto your investments and weathering the ups and downs of the market, you may find that common stock ownership can be a powerful tool for building wealth over time.
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