What Are Shares?
Shares are units of ownership in a company. The terms "shares" and "stocks" are often used interchangeably, but they represent a company differently. While this may seem confusing, it is a matter of how you're talking about a company and how much ownership you have in it. For example, say XYZ company issued stock and you purchased 10 shares of it. If each share represents 1% of ownership, you own 10% of the company. The company issued stock, and you bought shares of it.
Another way to think of it is that you purchase shares of a stock, you don't buy stock. Stock is a more general term, used to refer to the financial instruments a company issues, while shares are what you actually buy.
Key Takeaways
- Shares represent units of ownership in a corporation or financial asset owned by investors who exchange capital in return for these units.
- Common stock shares enable voting rights and possible returns through price appreciation and dividends.
- Preferred stock shares do not offer price appreciation but can be redeemed at an attractive price and offer regular dividends.
- Many companies issue shares, but only the shares of publicly traded companies are found on stock exchanges.
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Understanding Shares
When establishing a corporation, owners may choose to issue stock to raise capital. Companies then divide their stock into shares, which are sold to investors. These investors are generally investment banks or brokers that, in turn, sell the shares to other investors individually or through instruments like a mutual fund or exchange-traded fund.
Shares are the equivalent of ownership in a corporation. Because they represent ownership, not debt, there is no legal obligation for the company to reimburse the shareholders if something happens to the business.
However, some companies may distribute payments to shareholders through dividends. Others may elect not to do so, preferring to put all revenues towards operation, growth, and securing the company's future.
Founders, partners, or specific employees like executives generally own shares of privately held companies or partnerships.
How Shares are Issued and Regulated
Generally, a company’s board of directors is given a specific number of shares that can be issued. These are called authorized shares. Issued shares are the number of shares sold to shareholders and counted for ownership purposes. So, a corporation might have 10 million authorized shares but only issue 8 million.
Because shareholders’ ownership is affected by the number of authorized shares, shareholders may vote to limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they meet to discuss the issue and establish an agreement. When they agree to increase or decrease the number of authorized shares, a formal request is made to the state through filing articles of amendment.
The shares of publicly traded companies are listed on public exchanges, generally through a process called an initial public offering (IPO). This is an expensive, highly regulated, and lengthy process in which a company goes through fund-raising phases and scrutiny by regulators.
Private company shares are generally issued through company stock options or as other incentives to certain employees. These shares are still regulated but usually do not meet the Security and Exchange Commission's criteria to be listed on an exchange.
The issue and distribution of shares in public and private markets are regulated by the Securities and Exchange Commission (SEC). Share trading on the secondary market is overseen by the SEC and the Financial Industry Regulatory Authority (FINRA).
Types of Shares
As mentioned, any company can issue shares, but publicly traded companies are more likely to divide their stock into different types of shares.
Common Stock Shares
Many companies issue common stock, which is divided into shares. These are generally called common shares. These provide the purchasers—called shareholders—with a residual claim on the company and its profits, providing potential investment growth through both capital gains and dividends.
Common shares also come with voting rights, giving shareholders more control over the business. These rights allow the shareholders of a company to vote on specific corporate actions, elect members to the board of directors, and approve issuing new securities or payment of dividends. In addition, common stock can include preemptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.
Preferred Stock Shares
Preferred stocks can also be divided into shares, commonly called preferred shares. Compared to common shares, preferred shares typically do not offer much market appreciation in value or voting rights in the corporation. However, this type of stock typically has set payment criteria, like a dividend paid out regularly, making the stock less risky than common stock.
Because preferred stock takes priority over common stock if the business files for bankruptcy and is forced to repay its lenders, preferred shareholders receive payment before common shareholders but after bondholders. This priority treatment reduces the risk even further compared to common shares.
What Are Shares in Simple Words?
Shares represent a unit of ownership in the business that issued them.
What's the Difference Between a Share and a Stock?
A stock is an equity instrument issued by a corporation. It is divided into shares, which then represent ownership.
Do Shares Make You Money?
Common shares can make money through capital gains or buybacks. Preferred shares can make money for you through dividends or higher buyback prices.
The Bottom Line
Shares are units of stocks issued by a corporation that represent ownership. They are sold to investors and traders to raise capital for the company. Many businesses issue stocks and shares when they need funds for research and development, expansion, or other growth opportunities.
