Intro
In
financial terminology, stock is the capital raised by a corporation,
through the issuance and sale of shares. A shareholder is any person or
organization which owns one or more shares of a corporation's stock.
History
The first
company that issued shares was the Dutch East India Company
in the early 17th century (1602).
The
innovation of joint ownership made a great deal of Europe's
economic growth possible following the middle ages. The technique of
pooling capital to finance the building of ships, for example, made the
Netherlands a maritime superpower. Before the widespread adoption of
the joint-stock corporation, an expensive venture such as building a
merchant ship could only be undertaken by governments or by very
wealthy individuals or families.
Ownership
The owners
of a company may want additional capital to invest in new
projects within the company. They may also simply wish to reduce their
holding, freeing up capital for their own private use.
By selling
shares they can sell part or all of the company to many
part-owners. The purchase of one share entitles the owner of that share
to literally share in the ownership of the company a fraction of the
decision-making power, and potentially a fraction of the profits, which
the company may issue as dividends.
In the
common case, where there are thousands of shareholders, it is
impractical to have all of them making the daily decisions required in
the running of a company. Thus, the shareholders will use their shares
as votes in the election of members of the board of directors of the
company.
Each share
constitutes one vote (except in a co-operative society where
every member gets one vote regardless of the number of shares they
hold). Owning the majority of the shares allows other shareholders to
be out-voted - effective control rests with the majority shareholder
(or shareholders acting in concert). In this way the original owners of
the company often still have control of the company.
Shareholder
Rights
Although
owning 51% of shares does mean that you own 51% of the
company, it does not give you the right to use a company's building,
equipment, materials, or other property. This is because the company is
considered a legal person, thus it owns all its assets itself. This is
important in areas such as insurance, which must be in the name of the
company and not the main shareholder.
In most
countries, including the United States, boards of directors and
company managers have a fiduciary responsibility to run the company in
the interests of its stockholders.
Even though
the board of directors runs the company, the shareholder
has some impact on the company's policy, as the shareholders elect the
board of directors. Each shareholder typically has a percentage of
votes equal to the percentage of shares he or she owns. So as long as
the shareholders agree that the management (agent) are performing
poorly they can elect a new board of directors which can then hire a
new management team. In practice, however, genuinely contested board
elections are rare. Board candidates are usually nominated by insiders
or by the board of the directors themselves, and a considerable amount
of stock is held and voted by insiders.
Owning
shares does not mean responsibility for liabilities. If a
company goes broke and has to default on loans, the shareholders are
not liable in any way. However, all money obtained by converting assets
into cash will be used to repay loans and other debts first, so that
shareholders cannot receive any money unless and until creditors have
been paid (most often the shareholders end up with
nothing).
Types
of shares
There are
several types of shares, including common stock, preferred
stock, treasury stock, and dual class shares. Preferred stock,
sometimes called preference shares, have priority over common stock in
the distribution of dividends and assets, and sometime have enhanced
voting rights such as the ability to veto mergers or acquisitions or
the right of first refusal when new shares are issued (i.e. the holder
of the preferred stock can buy as much as they want before the stock is
offered to others). A dual class equity structure has several classes
of shares (for example Class A, Class B, and Class C) each with its own
advantages and disadvantages. Treasury stock are shares that have been
bought back from the public. Treasury Stock is considered issued but
not outstanding.
