Stock Market Basics: What Are Stocks?

Date Thursday, September 4th, 2008

If we were to define what a stock actually is, its fair to say that it is a share in the ownership of a company. The more shares you own, the greater the stake is in the company. The terms equity, stock or shares all mean the same thing. You have a claim on the company’s assets and earnings.

Before you start making big plans for this company you own shares with, it’s important to remember that you are one of many other owners. Some will have lots of shares, others only a few. Just like your peers, you have a say. However, the peers with more shares happen to have a bigger say. Those are the perks of ownership of voting rights to the stock.

Not so long ago (before the internet), shareholders were rewarded with a stock certificate. This acted as proof of ownership. When you wanted to sell your shares, you literally took the physical shares to your brokerage who would arrange the sale for you. Fortunately today, we dont have to worry about that kind of delay. The brokerage firm holds these documents electronically (called holding shares). Now when you want to sell, you just pick up the phone or click a mouse and your brokerage firm is no longer “holding shares”.

As a shareholder, there are a couple of things that you cannot do. While you may be a shareholder of Dell, dont expect to be able to order a new computer free of charge. Further, don’t plan a trip to Round Rock, Texas and expect to tell Michael Dell how to run his company on a day to day basis.

As a shareholder, there are a couple of things you can do. You can vote on who should sit on the board of directors, whether the company should allow more shares to become available on the public market and any other items that the CEO wishes to have the ownership of the company approve of before he/she makes his/her next move.

As shareholders, in theory, we have the power to remove a board of directors if they don’t return value for us. Sadly, it doesnt always work out this way, as there are several shareholders who own a large percentage of shares, and will often dictate whether the board stays or goes.

Besides, who wants all that work anyway? If management is making the company and shareholders money, what do we care?

If the company is successful, and has made some money, it has 3 choices:
a) pay off the company debt
b) use the cash to grow the business
c) pay the shareholders via a dividend payment

Its important to remember that as a shareholder, you have a claim on the assets and earnings. So if the company makes money, you make money (through the increase in the price of shares, or through a dividend cheque). However, if the company goes bankrupt, you get to claim the assets, which is usually nothing since the creditors get paid first, and you get paid whatever is left. Makes sense to hold on a company that knows how to make money.

Another little legal item to share with you… as the owner of a stock, you have limited liability. In English, this means that you are not personally liable if the company you’re a shareholder of, can’t pay its debts. Whew. If you were an owner in a partnership, that would be a different story.

By Christopher Smith

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