If you own a share of stock in a company, it means that you own an economic interest in the underlying business. But there's more to the story than that. Here's a rundown of what a share of stock is, and what investors should know about how shares of stock work.
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What is it?
What is a share of stock in a company?
You'll often hear the words "shares" and "stocks" used interchangeably, but there is a difference. The term stock is used to express equity ownership in a business. A stock represents a piece of ownership in a corporation.
On the other hand, a share of stock is aunit of ownership in the business. The number of shares determines how big of a piece of ownership in a business you have. If a company has 100,000 outstanding shares of stock and you own 1,000, you have a 1% equity ownership stake in the company's business.
If a company chooses to pay a dividend, it will be divided proportionally based on the total number of shares that exist. If stock owners have voting rights in corporate affairs, the voting rights given to shareholders are typically dependent on the number of shares you own.
Taking the terminology a step further, ashareholder is an individual who owns shares of stock in a company. This term is often (correctly) used interchangeably with stockholder.
The value of a share of stock depends on several factors, such as the sales, growth, or profitability (or lack thereof) of the underlying business, as well as overall market factors such as the health of the economy, interest rate conditions, and more.
Public vs. Private
Public versus private companies
While the general idea is the same in regard to equity in a business, there are some stocks that trade on the public stock markets and some that don't.
Publicly traded stocks are the most visible. These are companies like Microsoft (MSFT 0.28%) and Coca-Cola (KO 0.57%) whose shares can be bought on major stock exchanges by anyone with a funded U.S. brokerage account. But it's important to understand that privately owned companies have shares of stock as well -- they are just not available for purchase by everyday investors. The process a private company uses to become a publicly traded company, and therefore allow its shares to be owned by everyday investors, is known as an initial public offering, or IPO.
Types
Different types of stock
Technically speaking, there are two different types of shares of stock that you could buy -- common stock and preferred stock.
- Common stock: Common stock is what most people think of when they hear the word "stock." Common stock represents an equity ownership interest in a business, as discussed earlier. It's also worth mentioning that there can be different classes of common stock, even among the same company. For example, Alphabet (GOOGL 0.76%)(GOOG 0.65%) has two different classes of publicly traded stock. The difference? One has voting rights when it comes to electing board members and other shareholder votes, and the other doesn't.
- Preferred stock: Preferred stocks work quite differently -- they are more like fixed-income instruments, with a predetermined dividend amount and par value. Unlike with a common stock, preferred stocks don't represent a proportional share of a company's earnings -- no matter what a company earns, preferred shareholders get the same dividend and the intrinsic (par) value of the shares remains the same. Preferred shareholders don't have voting rights, while common shareholders generally do. Preferred dividends are generally superior to common dividends in terms of priority -- if a company is struggling financially, preferred stockholders must get paid before any common shareholders are. Preferred shareholders are higher in priority when it comes to claims on a company's assets in bankruptcy situations.
Related investing topics
Fractional Shares
Do you have to buy a whole share of stock?
Shares of stock are the smallest units of ownership in a company, but they aren't necessarily the smallest units that individual investors can own. In recent years, many brokerages have started to offer fractional shares to their clients, which can especially come in handy with high-priced stocks like Amazon.com (AMZN -0.27%). Without getting too technical, the key point to know is that the brokerage is still buying whole shares, but is essentially selling bits and pieces to its clients. In other words, if three investors wanted to buy 0.1, 0.4, and 0.5 shares of Amazon, respectively, the brokerage would buy one share and allocate it among the investors' accounts, dividing dividends and economic rights proportionally.
The takeaway is that if your brokerage offers fractional share investing, you don't necessarily need to buy a whole share of a stock to get an equity interest in the company.
Learn more about shares
- What are outstanding shares?
- Stock vs. Share: What's the difference?
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Matthew Frankel, CFP® has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
As a seasoned financial expert and enthusiast with a comprehensive understanding of stock markets and investments, I'll dive into the intricacies outlined in the article you provided.
Ownership and Equity: A share of stock is not merely a financial instrument; it signifies ownership in a corporation. This ownership is expressed through equity, and the article rightly points out that the number of shares one owns determines the extent of their ownership in a business. This connection to the underlying business is crucial, as it implies a stake in the company's profits and, if applicable, voting rights in corporate affairs.
Dividends and Voting Rights: The article correctly emphasizes that dividends, if declared by the company, are distributed proportionally based on the total number of shares. Moreover, the allocation of voting rights to shareholders is tied to the number of shares they own. This is a fundamental aspect of corporate governance, where shareholders can influence decision-making processes based on their level of ownership.
Public vs. Private Companies: The article adeptly distinguishes between publicly traded and privately owned companies. Publicly traded stocks, such as Microsoft and Coca-Cola, are accessible on major stock exchanges, while private companies have shares that aren't available for public purchase. The mention of an initial public offering (IPO) as the process by which a private company becomes publicly traded demonstrates an understanding of the financial ecosystem.
Types of Stock: The article goes on to explain the two main types of shares – common stock and preferred stock. The differentiation between them, particularly regarding voting rights and dividend structures, showcases a nuanced comprehension of the complexities within the stock market. The example of Alphabet having two classes of publicly traded stock further illustrates the diversity that can exist even within the same company.
Fractional Shares: The inclusion of fractional shares in the discussion reveals an awareness of recent developments in the stock market. Fractional shares allow investors to own parts of high-priced stocks, enhancing accessibility. The explanation about brokerages buying whole shares and dividing them among investors reflects a clear grasp of the evolving landscape of stock trading.
Additional Concepts: The article briefly touches on outstanding shares, highlighting that they represent the total shares of a company held by all shareholders. The mention of John Mackey and Suzanne Frey, both associated with significant corporations, adds a layer of credibility to the content.
In conclusion, this article provides a well-rounded overview of the concepts related to shares of stock, catering to both novice and seasoned investors. The author's demonstrated expertise is evident in the thorough explanations of ownership, dividends, stock types, and recent trends like fractional shares.
