• Common stock provides the rights of company ownership.kid hands with piggy bank #2 image by Gary from Fotolia.com
  
  Common stocks are known as "equities" because equity implies impartiality. In a financial sense, this means each share of common stock provides equal ownership of a company. Features of common stock are therefore tangible ownership along with commensurate entitlement to appreciating value and distributions of income.
  
  

Value

• Ownership of common stock means ownership of a company's book value. This is the value of company assets after deducting debts owed. The value of common stock in the market is commonly much higher than book value. That's because the company is expected to generate profits. The book value is only what owners of common stock obtain if a business ceases operating, liquidates assets and pays its debts. However, the components of a company's assets and debts embody useful features of common stock ownership.
  
  The potential for a company to create profits is a consequence of efficient management of assets and liabilities. Investors typically evaluate the level of company debt relative to equity and the structure of when that debt is payable from business profits. Efficient control of assets is measured by trends in the turnover of inventory and accounts receivable. Slower turnover indicates that managers of the stockholders' assets are holding too much inventory and not obtaining prompt from customers.
  
  

Price Appreciation

• Common stock appreciates in price because people bid increasing prices for ownership of the company. The most basic driver of price is the company's income that stockholders own. A company with rising earnings is attractive to prospective purchasers. Higher earnings produce higher common stock prices. The ratio of price to earnings (P/E ratio) is indicative of whether a common stock is costly or inexpensive to purchase. When buying an equivalent amount of earnings, a stock with a high P/E costs more than a stock with a lower P/E. Sometimes a high P/E is justified by a company's rapidly rising earnings. That's because common stock owners have a share in future profits, which are expected to continue increasing. Nevertheless, stocks with high P/E ratios do decline in price even when earnings rise. Potential owners of the common stock are sometimes unwilling to pay large prices for earnings that might not continue rising so quickly. Likewise, stocks with low P/E ratios are not necessarily bargains. If earnings are expected to decline, then potential owners will be wary about paying a low price for shares of shrinking income.
  
  The P/E ratio is not an exact signal to buy or sell a common stock. However, it does express how the appreciation feature of stock is a function of both price and earnings.
  
  

Dividends

• Dividends are a distribution of company earnings to the stockholders. Owners of common stock own the earnings even if the company retains them. In that case, the earnings increase the book value of the company. However, distribution of earnings as dividends provides an incentive to own common stock for current income. Dividends are commonly expressed as an amount paid per share. This permits a measurement of the dividend per share as a percentage of the stock price per share---the dividend yield. A prominent feature for evaluation of dividend-paying stocks is the sustainability of future dividends from expected cash flow. Many stable companies boast long histories of consistently paying dividends every year.