What Does Owning a Stock Actually Mean?
Does owning a stock make you a partial owner, or does it mean something else entirely?
Most people who are investors are proud to own stocks in the companies they admire. There's a reason why so many people boast about having stock in Facebook, Apple, or AliBaba. It's nice to be associated with companies that prove to be winners.
As much buzz as there is about stock ownership and stock market values, you'd think people would actually take time to learn what it really means to purchase a stock. Surprisingly, most people don't know what owning a stock really means—despite owning stocks themselves.
Really, this is one of the things to know before investing in the stock market. If you don't know what buying a stock means for you, you're probably losing out.
Did you ever wonder what it means when you buy a share of a stock? Here's the scoop of what stock ownership means, and why it's a far more powerful statement than you think.
To begin, let's talk about what the definition of a stock really is.
Most people have heard the idea that a stock is a share of a corporation or a company. Under this definition, you can buy ownership in a company and that you get more claim to the company and its assets.
This is only partially true—and many of the assumptions people make about owning a stock are outright false. Owning a stock isn't ownership of a company or its assets. If it meant that, companies wouldn't issue stock when they try to raise money.
It's owning the rights that come with having that stock, as well as the stock's monetary value that make investing in the stock market a worthwhile endeavor.
There are a lot of misconceptions about what owning a stock really means.
When you buy a stock share, you don't own part of the company. A company that can sell shares is a corporation, and in law, corporations are treated as people. You can't own a person.
Similarly, you don't own the corporation's assets by owning a stock. Otherwise, you'd be able to buy stock in Apple, then go into the building and take a chair without being arrested. (Hint: chair stealing is considered theft.)
So, let's talk about the truth about what owning a stock actually means, shall we?
Stock ownership doesn't mean you control the company; owning a stock means that you are willing to vote in investor meetings.
If you own stock in a company, it's assumed that you have faith in management. You don't get the right to kick down a company door and demand a bunch of changes. However, stock owners do have some say in how a company is run.
When companies decide to add another member to the board of directors, stockholders are given the right to vote on who gets to be on that board. The people who are on that board will run the company and work to increase the stock's value.
Owning a stock means that you are entitled to a cut of the company's profits—not assets.
Most people assume that buying stocks means that you get a cut of the corporation's assets. This is not true. Otherwise, you could literally pick up items that belong to the company and walk away with them.
It's actually the profits that shareholders get to enjoy. Profits can be given to shareholders in a couple of ways:
- Dividends. These are small annual or semi-annual payouts that companies give to stockholders.
- Stock Price Increases. Most companies don't offer dividends to stock owners, but rather reinvest all money from stocks into the company again. When this happens, the way that they give buyers profits is by increasing the value of the stock so that they will sell it at a profit.
Buying up stocks also doesn't mean that you have the right to refuse to sell them in certain situations.
Owning a stock is actually a surprisingly complex agreement between the owner and the corporation. To a point, owning a stock is a risk, simply because it means that you are putting yourself in a business agreement in which you give money to the company in exchange for future profits.
The company actually has the right to ask to end the agreement (via buying back stocks). In certain cases, the company may have the right to ask to buy back your stocks—or in the case of preferred stock, you might have the obligation to agree to sell your stocks if the company asks you to.
With a handful of companies, owning a stock can mean that you get company goods and services at a discount.
It's scary to say this, but a lot of people think that buying a stock entitles them to company discounts. For the most part, this is a bad assumption to make. The vast majority of companies that are traded on the stock market do not have this perk, and if you're buying stock for that benefit, you're going to be sorely disappointed.
There are some companies, such as Ford, Berkshire Hathaway, and IBM, that offer discounts and perks to companies. However, companies that offer shareholder discounts are the exception, not the norm.
Another thing owning a stock means is that you have the responsibility to do due diligence and take the risk of loss.
Every company out there can fail—even blue chip stocks. Buying stocks means that you accept that risk. To reduce that risk, it's up to you to research the stock in depth in order to determine whether the stock in question is as good an investment as you think.
Though the SEC does have some regulations businesses have to follow, the SEC is not legally obligated to save you if your stock share values crash. That being said, careful research is part of the game and if you're wise, you should benefit.
Owning a stock doesn't mean that you will get money back if the company goes bankrupt.
Though companies are required to offer shareholders the chance to sell off stock during a company's bankruptcy, a lot of shareholders don't actually get any money back when a company dies out. This is because other investors who may have had other routes tend to have first picks.
Those who invested in bonds or preferred stocks tend to see the most money back when they pull out of a bankrupt company. Common stockholders might not be able to recover any cash at all, unless you find someone foolish enough to buy stocks off of you.
Another thing that owning a stock doesn't mean is that you're wealthy.
Not all stock owners are wealthy individuals, although investing in the stock market is a very good move to do. Some investors are just average guys. Some don't really have that high an income at all. Heck, even some financial advisors aren't that well off.
Penny stocks are literally worth pennies, and buying them won't exactly make you the next Wolf of Wall Street. (In fact, they're one of the most dangerous investments you can make and will more than likely make you broke if you're not careful.)
However, owning a stock does mean that you're making an important step in your financial health.
Stock ownership is a way to make your money work for you, and while it's risky, it is a sign that you're taking your finances seriously. So, kudos. You're showing that you have foresight, potential to make it big, and a lot more brain than others.