|What owning a stock actually means
By Investopedia Staff, Investopedia.com
When I first started investing, I had some misconceptions about
the benefits and the responsibilities that came with being a shareholder.
So, I thought I'd write an article on my past false conceptions
to spare anyone else any embarrassment. Here goes.
Most people realize that a certificate of stock gives you a percentage
of ownership in the company. One thing that some may overlook, however,
is the amount of ownership that each stock represents. For large
companies like IBM and GE, which have approximately 1.75 and 10
billion shares respectively, one share is merely a drop in the pond.
So, even if you own 1 million dollars worth of shares, you'll
still be a small potato with very little equity in the actual company.
So what does this mean? Well, let's look at what it does not mean.
Misconception 1: I am the Boss
First of all, you're better off not thinking that you can bring
your share certificates into the corporate headquarters to boss people
around and demand for a corner office. As the owner of the stock,
you've placed your faith in the management of the company and
how it handles different situations. If you are not happy with the
management, you can always sell your stock, but if you are happy,
you should hold onto the stock and hope for a good return.
Furthermore, next time you are pondering whether or not you're
the only person worried about a company's stock price dropping,
you should remember that it's more than likely that many of
the senior company executives, or insiders, own as many, if not more,
shares than you do. Now this isn't a guarantee that the company's
stock will do well; however, it is a way for companies to incent their
executives to maintain or increase the stock's price. Be careful
though: insider ownership is a double edged sword as executives may
get involved in some funny business to increase artificially the stock's
price and then quickly sell out the personal holdings for a profit.
though you don't directly get to manage the company with your
stocks, you can, if your stock has voting rights, vote for those
directors who do. These are the people that typically hire upper
management, which hires lower management, which hires subordinate
employees. Thus, as an owner of common stock, you do get somewhat
of a say in controlling the shape and direction of the company even
though this say isn't a direct control.
2: I get a discount
Another misconception is that ownership in a company translates
into discounts. Now, there are definitely some exceptions to the
rule. Berkshire Hathaway, for example, has an annual gathering for
its shareholders where they can buy goods at a discount from Berkshire
Hathaway's held companies. Typically, however, the only thing you
get with the ownership rights of a stock is the ability to participate
in the company's profitability.
you asking yourself why it would hurt for you to get a discount?
Well, this answer can get a little complicated. After some thought,
you probably would not want that discount. Let's look an example
of Ben's Chicken restaurant (owned by Ben and a couple of
his friends) and Cory's Brewing Company (owned by millions
of different shareholders). Because only a few people own Ben's
Chicken Restaurant, the discount would only be a small portion of
the restaurant's income and revenue, which the owners would
bear. For Cory's Brewing Company, the loss in income and revenue
would also be borne by the owners (the millions of shareholders),
but, because revenue is the main driver of stock price and the loss
from a discount would mean a drop in stock price, the loss from
a discount would be more substantial for Cory's Brewing. So, even
though an owner of stock may have saved on a purchase of the company's
goods, he or she would lose on the investment in the company's
stock. Thus, the discount isn't nearly as good as it initially
3: I own the chair, the desk, the pens, the property, etc…
As an investor in a company, you own a portion of the company (no
matter how small that portion is); however, this doesn't mean
that you own property of the company. Let's go back to Ben's
Chicken Restaurant and Cory's Brewing Company. Quite often,
companies will have loans to pay for property, equipment, inventories,
and other things needed for operations. Ben's Chicken Restaurant
received a loan from a local bank under certain conditions whereby
the equipment and property are used as collateral. For a large company
like Cory's Brewing Company, the loans come in many different
forms: through a bank or from investors by means of different bond
issues. In either case, the owners must pay back the debtors before
getting any money back.
both companies, the debtors, who are the bank and the bond holders
(in the case of Cory's Brewing Company), have the initial
rights to the property, but the debtors typically won't ask
for their money back while the companies are profitable and show
good capacity to repay the money. However, if either of the companies
becomes insolvent, the debtors are first in line to the assets of
the company. Only the money left over from the sale of the company
assets is distributed out to the stock holders.
Hopefully we've been able to dispel any misconceptions that
some stock holders have about the powers of ownership. So, next
time you think about taking your stock certificate into the nearest
McDonalds to get a discount on a Happy Meal, fire the employee after
they refuse to give it to you, and finally walk out in disgust with
a McFlurry machine, you should remind yourself of this article.