Having learnt the history and little beginning of the stock market, you are now informed enough to dig deeper into the fundamental processes involved in stock market investing. If the stock market is completely new to you, then you would have to read with much more attention so as to understand better. Nevertheless, this book is very explicit on the subject matter.
What is a Stock?
A stock is a share of a company’s capital investment which is held by a shareholder, who by virtue of holding a share of the company’s capital has become a part owner of the company and can therefore lay part claims on it.
You should know that being a shareholder does not qualify one to lay unwarranted or unauthorized claims on company assets or human resources, as regards property or staff/customer respectively. Regardless the percentage of the company one owns, one has no absolute powers to claim company assets or to hire and fire members of staff, since one only owns a part of the company. A reverse of this is seen in a sole proprietorship where in taking major business decisions, the owner has complete voting rights, and so is in total control of the company.
Understand that shareholders only own a part of a company and not the whole company as they only hold a proportion of the shares issued to the company upon incorporation. Incorporation makes the company recognizable under the law, giving it the legal standing to file tax payments, own properties, apply for loans, sue and be sued, and so on. This further explains why a shareholder cannot practically lay claims on company assets (such as equipment) and other properties not incorporated in the issuance of the company’s shareholding capacity.
It is pertinent to note that there is a clear demarcation between properties owned by the shareholders and those owned by the corporation. Assuming the corporation declares bankruptcy, it can only sell off its corporate assets excluding shareholders’ personal assets, as the court lacks the jurisdiction to compel any shareholder to sell his shares in event of bankruptcy, although the value of shares owned by each shareholder will plummet significantly. In the same vein, the shareholder has no rights whatsoever, to sell off the corporation’s assets as a means of repaying his personal debt in case he goes bankrupt.
Owning, say 10 percent of company shares does not necessarily mean you own one-tenth of the company assets since you cannot do as you wish with property which are solely owned by the company. The major benefits of owning company shares are to earn you shareholder’s dividends and to qualify you to express your voting rights by expressing your views whenever major business decisions are being taken among shareholders.
The volume of shares held by a shareholder however determines the amount of voting powers wielded by such shareholder. Greater volume of shares gives a shareholder greater relevance and powers in decision-making and in the appointment of the board of directors of the company, who are saddled the function of making sound judgments on the hiring of company’s management staff for excellent business outcome.
Let us look at a case where a company is acquired by another company probably because the acquired company is unable to fund its operations and so is compelled to sell off. The acquiring company only buys the shares, not the assets of the acquired company, except where the acquired company decides to offer its assets and staff as well, in which case, the acquiring company is at liberty to adopt none, some or all assets as well as staff.
Who are Ordinary Shareholders?
Ordinary shareholders are those entitled to receive dividends depending on the shareholder’s investment worth as well as the financial standing of the company. Shareholders who invest more earn more. The greater the company’s profits within a given fiscal year, the greater the dividends received by shareholders.
Some companies do not initially trade their stocks, and so do not pay dividends but rather reinvest their profits into the business to make the company more profitable and the shares more valued by potential shareholders who await the announcement of the sale of shares at the company’s best time.
Fundraising by Companies
When companies initially want to raise funds, they either take loans from banks or issue bonds to potential bondholders. Bondholders are different from shareholders since bondholders do not only own part of the company but are creditors of the company other than banks. By this, they are equally entitled to interests on principal investments, just as banks.
In addition, bondholders are top priority in the case of bankruptcy and are therefore paid off following the sale of company assets while the shareholders get whatever is left or even nothing depending on the extent of financial damage incurred by the company.
This does not however mean that buying of shares is no longer a profitable venture as no one ever expects a company to go bankrupt especially where the company is financially stable. The shareholders may even enjoy dividends for life as long as the company makes profit in any given fiscal year. It should however be noted that bondholders are not almighty as may be erroneously perceived. They only get dividends based on the interest rate stated in the bond agreement which is usually about five to seven percent as against the wider range of shareholder dividends which depends on the company’s profit margin and has been seen in history to hover around eight to ten percent.
Whenever a company wants to expand their business, it often issues stocks through the primary stock market (directly from the company) or secondary stock market (indirectly from investors who have previously purchased shares from the company), so as to raise funds and increase its capital base of the company. So, if you are interested in purchasing stocks, you can do that through either the primary or secondary stock markets, bearing in mind that stocks are usually cheaper at the primary market.