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What owning shares in a company actually means
A share is a unit of ownership delivered by a capital company. In most cases, it is a commercial company with a limited liability. Holding one of several shares – in other words, being a shareholder – means that you own a part of the company’s capital but you are not held personally liable for the company’s debts.
Generally, shares are freely negotiable and transferable. As a shareholder, you can decide at any time to sell all or some of your shares to other investors. You can sell them – or buy them – at a stock exchange if the company is listed on a regulated market or in a private exchange (in this case, the transaction takes place between the vendor and the buyer).
Why hold shares?
Firstly, being a co-owner of the company means you have the following rights, whatever the number of shares you own:
· the right to dividend payment: in proportion to the amount of shares you own, you have the right to receive a portion of the company’s profit every year – provided that the company has made a profit and decides to distribute all or some of the profit to their shareholders. That’s not always the case.
· the right to vote: except in extraordinary circumstances, any person who owns at least one share of the company can attend the annual general meeting of that company and express their opinion on the management team.
· the right to information: if the company is listed on the stock exchange, you have the right to receive certain kinds of information (about its financial situation, its politics, etc.)
Another advantage of shareholding is that shares can increase in value over time according to the rules of supply and demand. For a company quoted on the stock exchange, the share price of its capital stock will evolve according to the sales and purchases of investors. In theory, the share price on the stock exchange increases in proportion to the company’s profits. Investors anticipate higher profits and decide to buy shares. Demand outstrips supply and the share price increases. On the contrary, if the financial results are lower than expected, there are too many shareholders looking to sell and the share price decreases. In practice, it is more complicated than that because external factors such as economic circumstances, the level of interest rates, the financial results of a competitor, etc. can affect share prices.
Buying individual stock is a risky business
In a way, owning stock in a company is similar to making a bet. You are betting on the likelihood that the share price will climb and that you will realise a large gain when selling your shares. But you can also be mistaken and lose all or some of your investment capital. If your degree of risk aversion is high, you’d better choose other forms of investment.
11/2021
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