A common stockholder is typically defined as an individual who owns shares of common stock, a percentage of ownership in a corporation, which, from a priority perspective, is the lowest tier of ownership available to individuals. In the event of bankruptcy, for example, common stockholders will only receive compensation after the claims made by preferred shareowners and bond owners are satisfied, among others. That being said, owning common stock still entitles an individual to a certain share of profits. The net income applicable to common shares is equal to the amount of after-tax profit available minus the required profit that must first be allocated to preferred shareholders.
The earnings available to common stockholders are typically calculated by subtracting dividends allocated to preferred shareholders from after-tax profit.
Evaluating the Common Stock Formula
In order to get started calculating your profits from common stock you own, you will first need to obtain a copy of the profit reports for the company in which you own shares. With this documentation, you should be able to locate information concerning after-tax profit, either annually or for the quarter. This sum represents the pool of funds available to all shareholders.
With this information, you must next deduct any profit that will be allocated to preferred shareholders. You can find this data by seeking out any reporting related to dividend payments to preferred shareholders. Once the sum of dividend payments has been subtracted from the after-tax profit, the remaining sum will be available for common stock shareholders.
Researching the History of Common Stock Performance
It may seem that common stockholders are getting a "raw deal" with respect to their investment. That being said, it is also important to remember that common stock has historically outperformed various other investment tools. With that in mind, investing in common stock is considered a prime strategy for many individuals. Using a small amount of math, you can quickly begin to calculate your own expected earnings from common stock.
Exploring Earnings Vs. Dividends
A critical distinction must be made between the earnings available to common stock owners and the dividend checks sent to preferred shareholders. Common stock equations do not typically factor in dividend payments to owners of these shares. Generally speaking, common stockholders do not receive a check when a company reports their after-tax profits. Instead, the earnings available to common stockholders can be channeled into the stock, raising its earnings per share value. When a stockholder decides to sell their shares, this increased earning per share value will translate to a higher sale price and, consequently, increased profit from the transaction.
Voting on Dividend Payments
If dividends are to be paid to common stockholders, this decision must be made by the board of directors for the company. In the event that dividends will be paid the board of directors will allocate a specific portion of after-tax profit to this as they see fit. Common stockholders will have little, if any, decision-making ability with respect to this particular issue. That being said, common stockholders can vote on elections for board of directors when these opportunities arise.
Locating More Information
Common stockholders who would like to retrieve all pertinent data regarding current earnings available as well as historical payouts can utilize the U.S. Securities and Exchange Commission's EDGAR database. This trove of data includes all Form 10-K and Form 10-Q filings that have been made by publicly traded companies. These forms give stockholders access to annual and quarterly financial positions of a company, respectively.
Again, although it may seem that common stockholders continue to receive the bare minimum with respect to profitability, it is important to remember that this particular investment platform has long outperformed its peers with respect to return rates. With that in mind, common stockholders should eagerly welcome news of corporate profits and hold on to their shares in order to profit over the long term.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.