Common stock represents a claim on residual income.

Question

Quizplus · Accepted Answer

Common stock represents ownership in a company and gives the shareholder a right to a portion of the company's residual income (profits) after all other obligations have been met, such as taxes, debt payments, and preferred stock dividends. Therefore, common stockholders are entitled to receive dividends if the company decides to distribute profits, and they may also benefit from share price appreciation.

Common Stock Represents a Claim on Residual Income