Stock Ownership, What it Means
When buying stock one is buying part ownership in a company and that means the stakeholder has a claim on the companies assets and earnings.
There are thousands of companies that trade publicly in the US market alone and they generally offer 2 different types of stock one can buy.
The most popular is Common and the other is Preferred.
Common stock is what is trade in the open market and is what most companies offer to the public. When buying Common shares of a company the owner gains the right to vote at shareholders’ meetings and receive dividends, if the company pays them.
Preferred shares are less common and usually less liquid than Common shares but you will have a higher claim on the companies assets over common shareholders. So if a company goes bankrupt, Preferred shareholders would be 1st in line over common stakeholders to receive their assets back, a Preferred shares represent debt.
Buying equity means purchasing shares in the open market and becoming a shareholder of that company.
The amount of shares that are available to trade in the open market is called the float, but there may be more shares that are held by insiders and employees that are restricted from trading.
Companies can reduce or increase the amount of shares available through splits.
For example, a company that issues a 2–1 stock split will increase the amount of shares available by 2X, resulting in the stock price being reduced by 50%.
So if Microsoft (NASDAQ:MSFT) had 1,000,000 shares outstanding with a stock price of 50 and they issue a 2–1 stock split, they would then have 2,000,000 shares outstanding with a stock price of 25. The reason companies usually do this is to reduce the price per share, because it has become more expensive than other companies in its sector and less attractive for investors.
One share equals 1 unit of ownership in a company so the more shares owned the more one owns of the company.
So say you own 1,000 shares of a company’s stock and they have 100,000 shares outstanding, then you own 1% of that company.
Generally companies will issue shares to the public so that they can raise money to further business operations or pay down debt and in return they will work hard to make the business more valuable resulting in your shares being worth more money.
Have a terrific week.