- Shares are fractions of a business;
- They fluctuate in value on an open market;
If you own a share; you own part of the business. So, a share is fractional ownership of the business.
Hypothetically, ABC Ltd. has 100 shares, and you buy ten.
You own 10% of ABC Ltd.
By buying a share of a company, you become a shareholder. As a shareholder you own some of the company, experts would say you have an ownership interest.
Most stocks come with voting rights. The general rule is your voting power is proportional to the amount of shares you own. There are exceptions such as stocks with multiple share classes.
People are unlikely to own enough shares to personally influence the company. However, some people like activist investors or founders may.
Note: In this post we will use ‘stock’ to refer to the ownership certificate of any company and ‘shares’ to refer to the ownership certificates to a particular company.
Where did the first share come from?
The Dutch East India Company was the first company to issue bonds and shares to the public. Many people credit the Dutch East India Company with the invention of selling company stock to the public. Prior to this, investors would invest in specific ventures of a company, rather than the company itself.
It’s fitting that the oldest stock certificate we have today comes from the Dutch East India Company.
Ownership of shares is documented by issuing a stock certificate. A stock certificate is a legal document that specifies how many shares are owned by the shareholders. Today, stock certificates are mostly digital.
While it is common to have voting rights as a shareholder, some companies have dual/multi class stock, which means the company issues various types of shares that may have different voting rights and dividend entitlements.
An example of a multi class share
Alphabet (Google) is a famous multi class share. There are two types that are publicly traded on the NASDAQ, GOOG and GOOGL, and one privately held type.
The reason Alphabet (Google) has multi class share is to provide the founders and executives with the ability to control the majority of shareholder voting power with a relatively small amount of the total equity.
One characteristic that differentiates public from private stocks is market liquidity. Market liquidity is the ability to buy or sell an asset without causing a drastic change in the asset’s price.
Generally, liquidity is greater in public stocks compared to private stocks. As public stocks are easier to buy and sell through public exchanges like the ASX.
GOOG is a Class C share with no voting rights and GOOGL is a Class A share has 1 vote.
Insiders hold Alphabet (Google)’s class B shares which have 10 votes, with founders Larry Page and Sergey Brin holding most, alongside Executive Chairman Eric Schmidt.
While not everyone approves of multi class stock, supporters think it allows strong leadership teams to focus on long-term growth. Opponents think a small group of insiders should not maintain control without providing most of the capital.
While owning 50% of total shares equals 50% ownership in the company, it does not mean the shareholder can use a company’s building, equipment or other property. If a company is a limited liability company, it means a shareholder you are likely not responsible for the company’s liabilities.
If the stock price of the company you invest in goes to zero dollars–it may be delisted from the stock exchange and become worthless to investors.
There are many reasons why a stock may go to zero, unfortunately, it’s often because the stock is worthless because of bankruptcy, operating problems, product availability, quality issues or mismanagement.
This means owning stocks does not mean responsibility for liabilities. If a company you invest in goes under, and defaults on its loans, you as a shareholder are not liable.
However, money from converting assets into cash must repay loans and debts first, before shareholders can receive anything.
Why invest in stocks?
If keep your money in cash, your money may actually be worth less later.
Because if you don’t keep pace with inflation, your money will have less purchasing power.
Purchasing power refers to how much you can buy with a set amount of money. A simple example is a bottle of Coke. In the past, you could buy a Coke for five cents.
By investing your money, you will not suffer what investors call cash drag.
Cash drag is when part of your total balance is not invested in securities but in cash or cash-equivalents that have no market exposure. This portion of your portfolio will not have exposure to potential returns or losses.
Historically, investing in stocks has been one of the best places to invest. If you invested in the S&P 500 from 1950 to 2009, you would have seen an average annual return of 7%.
While you wouldn’t have seen consistent growth, if you left your money in the markets, you would have had growth over the long-term. It’s important to note, past performance is not indicative of future performance.
This is why it has been best to invest over the long-term with stocks. As it has taken years, even decades to recover from the worst historical declines.