Final answer:
Common stock is the equity security representing the residual value of a corporation. It provides shareholders with potential dividends and capital gains, along with voting rights in corporate matters. Corporations primarily raise funds through an IPO, and investors often use diversification to mitigate risks.
Step-by-step explanation:
The type of equity security that represents the residual value of a corporation is Common stock. When you invest in common stock, you obtain partial ownership in a firm. This ownership comes with the potential for dividends, which are direct payments from the firm to its shareholders based on the company's profits. Another way to receive a return on this investment is through capital gains, which occur when the stock is sold for more than the purchase price. Unlike other types of stocks, common stock shareholders typically have voting rights that allow them to vote on corporate matters, including the election of the company's board of directors.
A corporation can raise early-stage financial capital by selling common stock, often starting with an initial public offering (IPO). After this, shares can be bought and sold on the stock market, but the company receives financial capital only during the initial offering. Diversification is a strategy recommended for investors to reduce their level of risk by investing in a wide range of companies and securities, including common stocks.