Understanding Stock Ownership: Investing in Company Shares

Buying a share of stock in a share market investment gives you the rights to ownership of a company. Stock represents a percentage share of ownership for an individual and others who buy stock and allows them to participate in certain decisions regarding the management of the company.

Authorizing Shares

When a company if formed, they will fix a number of shares, by which they can eventually sell. These shares are the authorized shares of the company and remain in the company’s treasury. When a company goes public, some of the authorized shares are issued as part of the offering, making them issued shares. These shares are also outstanding, so long as they continue trading publicly. Those shares that are authorized but remain in the company’s treasury are referred to as treasury shares.

Shares that are issued and outstanding receive certain privileges of ownership. A holder of any amount of a company’s shares, from 1 to 100,000, has the right to vote on a company’s Board of Directors, examine the books and records of the corporation and receive a share of profits in the form of dividends. Dividends are only required to be paid to a shareholder when declared by the company.

Classes of Shareholders

A company is not permitted by law to create separate classes of shareholders. If a company does so, they are denied access to the public markets in order to raise capital.  All shareholders must be treated equally in proportion to the number of shares that the own. For example, a company that has issued 1,000,000 shares of its stock to the public confers a 1 percent ownership right to an investor with 10,000 shares.  An investor with 100,000 shares has a 10 percent ownership basis in the company.

Dividends

Dividends are paid out on a priority basis to shareholders. Preferred and cumulative preferred shareholders are first in line for any dividend distribution of the company followed by common shareholders. Although these appear to be different classes of shareholders the difference between preferred and common shareholders is that common shareholders are permitted to vote on corporate matters while preferred shareholders are not.

Common Shareholders Versus Bondholders

The rights of ownership are a chief difference between common stock owners and bondholders of the company. With an equity stake in the company a shareholder can have influence over the management of the company. A bondholder is a creditor who receives priority claim to assets when a company declares bankruptcy and liquidates its assets.