What is a Share of Stock?
If you own a share of stock, you have a vested interest in a company’s success. Shares are a unit of investment that represents ownership in an entity—this includes both share of a stock or shares of a fund. Shares are usually issued when companies or funds want to raise capital. The more shares you own, the larger your ownership stake in the enterprise.
At its most basic concept, a share is a unit of measurement. Yet, the unit of measurement differs across every company. One share of the Walt Disney Corporation (NYSE: DIS) has a much different value than one share of Bed Bath & Beyond Inc. (NASDAQ: BBBY). To understand why, we need to look at what a share of stock represents beyond a fractional ownership stake.
Why do Companies Issue Shares of Stock?
Capital markets are one of the primary ways for companies to leverage their earning potential into shareholder capital, for a variety of purposes. Sometimes companies need the capital to fund a merger or acquisition. Other times, they want to expand revenue streams with new investment in assets. Sometimes, investor capital is less cumbersome than traditional loans. Whatever the case, companies issue stock to raise money.
The decision to raise money through a shareholder offering sets the tone for how much a share is worth. As a company works with a bank to facilitate a primary offering, it specifies how many shares it will issue based on the value of the company. This takes the form of a prospectus document, which is public-facing and allows investors to better-understand the context for offering shares: why, how much and how many.
Shares of Stock Are a Unit of Measurement
After they’re made available, a share is effectively a unit of measurement of ownership. If a company issues 100,000 shares and Jim buys 1,000 shares, he has an ownership stake equal to 1% of the company. This then entitles Jim to 1% of the company’s revenue distributed to shareholders.
After a company issues shares, the number of shares doesn’t change (unless it petitions to distribute more). The value of a share may go up or down, but the percentage of ownership it represents is unchanging. Buying increases your total ownership stake in the company; selling decreases it. This, in turn, changes how much distributed capital you’re entitled to as an owner. For example:
Lisa buys 1,000 shares of ABC Company for $10 per share. The company has 100,000 outstanding shares, which means her $10,000 stake is worth 1% of the company. The share price rises to $15 and she buys another 500 shares for $7,500. She now has a 1.5% ownership stake at $1,750.
Shares of stock represent a static percentage of ownership. Changing stock prices represent a measure of investor sentiment. While you might pay more or less for a share over time, you’re still paying for the same fraction of ownership at any price.
Share of Stock Types
The term “share” can come with context depending on what type of rights it entitles shareholders to. Most people will purchase ordinary (common) shares through a broker. However, there are many different types of shares to consider.
- Ordinary shares come with basic voting rights and equal rights to dividends among other common stockholders.
- Preferred shares represent stock with higher dividend or priority dividend, as well as a priority claim to assets in the event of insolvency. They’re often non-voting shares, issued to early-stage investors and partners.
- Deferred shares have fewer rights than ordinary and preferred shares, and are typically last to receive dividends or liquidation payouts. They usually become ordinary shares after a certain date or when the possessor meets certain criteria.
- Non-voting shares can include preferred shares, but exist independently from them. They’re useful as a way to increase the number of shares of a company, without diluting the ownership voting power via new shares.
- Management (ownership) shares include extra voting rights, often at 2:1 or 4:1 against common stock. They’re primarily used as a tool to keep administrative power consolidated among engaged owners and management.
- Redeemable shares can be bought back by the company in the future, generally at the issued price. They’re almost always given to employees and come with a vesting schedule that predetermines the buy-back date.
There are also sub-classifications of shares, usually labeled as A, B or C. There’s no standardization for what these subclasses mean. For example, Berkshire Hathaway Inc. Class B shares (NYSE: BRK.B) exist to make the company more accessible—its Class A shares trade for more than $400,000 per share! Meanwhile, Alphabet Class A shares (NASDAQ: GOOGL) represent its common stock, while Alphabet Class C shares (NASDAQ: GOOG) are preferred shares with no voting rights.
Representing a Vested Interest in Company Success
The fundamental purpose of the stock market is for companies to access investor capital and for investors to reap the benefits of lending that money. This mutually beneficial transaction happens through the sale of stock, with shares representing a specific stake. The more shares you have, the higher your ownership stake in the company—and the more of its distributed revenues you’re entitled to. Stock price may change but its representation of vested interest doesn’t.
Whether it returns value through the form of dividends or capital gains through appreciation, a share of stock is one of the most powerful investment vehicles in the world. Investors have no shortage of strategies to capitalize on the potential for wealth generation, created by the capital they’re willing to lend investors.