A share represents a unit of equity ownership in a company. It is essentially a piece of the company’s capital that can be bought or sold by investors. Shares are typically issued by both public and private companies. They entitle the shareholder to certain rights within the company and may include benefits such as voting rights and the potential to receive dividends. Shares are also traded on stock exchanges, and their value can fluctuate based on the company’s performance and stock market conditions. In simple words, owning shares means having a stake in a business and a claim to a portion of its profits and assets.
When a corporation is established, its owners often opt to issue stock as a means to raise capital for the company. This process involves dividing the company’s ownership into shares, each of which can be sold to investors. Typically, these initial investors include investment banks or brokers, who later make the shares available to individual investors or through investment vehicles like mutual funds or exchange-traded funds.
Shares serve as the equivalent of ownership in a corporation, granting shareholders certain rights and privileges within the company. It’s essential to recognize that owning shares signifies ownership, not debt. This means that the company isn’t legally obligated to reimburse its shareholders in the event of unforeseen circumstances or business setbacks.
One way in which companies may provide returns to their shareholders is through dividends. These are periodic payments distributed to shareholders out of the company’s profits. Some companies choose to pay dividends as a way of sharing their financial success with their shareholders. On the other hand, some companies may decide not to issue dividends, opting instead to reinvest all their revenues into the operation, growth, and long-term security of the business. This decision hinges on the company’s strategic objectives and its view of how best to allocate its resources.
Authorized Shares and Issued Shares. A company’s board of directors typically has a predetermined number of shares that they can issue, known as authorized shares. The actual number of shares sold to shareholders and counted for ownership purposes is referred to as issued shares. For example, a corporation may have 10 million authorized shares but may only have issued 8 million. Shareholders’ units of ownership stakes are directly affected by the number of authorized shares.
Shareholder Involvement. Shareholders have the power to influence the number of authorized shares. They can vote to limit or expand this number based on what they deem appropriate. When shareholders wish to modify the number of authorized shares, they convene to discuss and reach an agreement. Any changes in the number of authorized shares require a formal request to the state, typically through the filing of articles of amendment.
Publicly Traded Companies. Shares of publicly traded companies are listed on public stock exchanges, often through a process known as an Initial Public Offering (IPO). An IPO is an elaborate, highly regulated, and time-consuming procedure. During an IPO, a company goes through fundraising phases and faces rigorous scrutiny by regulatory bodies.
Private Company Shares. Private company shares are usually issued through stock options or as incentives to specific employees. While these shares are subject to regulation, they often do not meet the criteria set by the Securities and Exchange Commission (SEC) for listing on an exchange.
Regulation. The issuance and distribution of shares in both public and private markets are heavily regulated. The primary regulatory authority for the U.S. is the Securities and Exchange Commission (SEC). The SEC monitors and enforces securities laws, ensuring that companies follow all regulations concerning the issuance, sale, and trading of shares. For publicly traded shares, share trading on secondary market is overseen by both the SEC and the Financial Industry Regulatory Authority (FINRA).
Many companies issue common stock, which is divided into shares known as common shares. These shares provide purchasers, often referred to as shareholders, with a residual claim on the company and its profits. Common shares offer investment growth potential through capital gains and dividends.
Voting Rights. Common shares come with voting rights, granting shareholders a say in the company’s decisions. These rights allow shareholders to participate in voting on corporate actions, elect members to the board of directors, and approve actions like issuing new securities or distributing dividends.
Preemptive Rights. Common stock can also include preemptive rights. These rights ensure that shareholders have the opportunity to buy new shares when the company issues them, allowing them to maintain their percentage of ownership.
Preferred stocks are another type of shares, often referred to as preference shares. In contrast to common shares, preferred shares typically do not offer significant market appreciation in value or voting rights within the corporation. However, preferred stock does offer specific advantages:
Steady Payments. Preferred shares typically come with set payment criteria, such as regular dividend payments. This predictability makes preferred stock less risky compared to common stock.
Priority in Bankruptcy. In the event that a business faces bankruptcy and must repay its creditors, preferred shareholders enjoy priority over common shareholders but come after bondholders in the payment hierarchy. This priority treatment reduces the risk associated with preferred shares, making them a more secure investment option.
Dividends. Shareholders can benefit from dividends, which are cash rewards distributed by the company from its annual profits. The more shares you hold, the larger your share of these dividends. This can provide a consistent stream of income for investors, making it an attractive feature of share ownership.
Liquidity. Shares that are listed on stock exchanges are highly liquid, meaning they can be easily bought and sold through exchange platforms. This liquidity offers investors the convenience of trading without the need for brokers or intermediaries, and at a relatively low cost compared to other financial products. Furthermore, trading on an exchange allows you to sell only a portion of your share holdings if needed, rather than having to redeem the entire investment.
Part-ownership of a company. When you invest in shares, you become a part-owner of the company. This means you have a direct stake in the company’s performance and success.
Real-time dealing throughout the trading day. Shares provide the flexibility of real-time trading, allowing you to buy and sell shares during market hours. Additionally, limit orders are available even when markets are closed, giving you control over the price at which you buy or sell.
Receive dividends. Shareholders have the opportunity to receive dividends, which can be taken as income or reinvested to acquire more shares. This provides a consistent stream of returns from your investment.
Ability to vote on important company decisions. Shareholders often have the privilege to vote on critical company decisions. These decisions can include electing board members, approving major corporate actions, and endorsing dividend payments. This active involvement in corporate affairs gives shareholders a say in the company’s direction.
Investing in shares can be a lucrative endeavor, but it’s essential to acknowledge the risks involved. Like any investment, shares come with their set of uncertainties, which include:
Volatility. Share values are often characterized by their volatility. They can experience rapid and significant price fluctuations, and in some cases, share prices may even plummet to zero. This volatility can be challenging for investors, especially those with a low-risk tolerance, as it can result in both substantial gains and losses.
Credit Risk. Owners of ordinary shares face credit risk. In the event of a company’s failure, shareholders are typically the last in line to recover their investments, and there may be no chance of getting any money back. Creditors and bondholders usually have a higher claim on the company’s assets in such situations. This means that shareholders may not recover their investment if the company experiences financial distress.
Unexpected Events. Unpredictable events that are beyond an investor’s control can significantly impact share prices. These events might include company-specific bad news, changes in government policy, or natural and man-made disasters. Such unexpected developments can lead to rapid declines in share prices and potentially result in substantial financial losses for investors.