You may have heard of the popular definition of stocks: “Stocks are part of company ownership. Stocks represent claims for company assets and earnings. As you get more stock, your share of ownership in the company becomes bigger.” Unfortunately The definition is that this definition is incorrect in some key respects.
First, shareholders do not own the company; they own the shares issued by the company. But companies are a special kind of organization because they are treated as legal persons. In other words, the company submits taxes, can borrow, can own property, can be sued, and so on. The idea that a company is “people” means that the company has its own assets. A company office filled with chairs and tables belongs to the company and not to shareholders.
This distinction is important because company property is legally separated from shareholder property, which limits the responsibility of the company and its shareholders. If the company goes bankrupt, the judge can order the sale of all of its assets – but your personal assets are not at risk. The court can’t even force you to sell your stock, even though the value of your stock will fall sharply. Similarly, if a major shareholder goes bankrupt, she cannot sell the company’s assets to pay off the creditors.
Shareholders own shares issued by the company; the company owns assets. Therefore, if you hold a 33% stake in the company, it is incorrect to assert that you own one-third of the company’s shares; instead, it means that you own 100% of the company’s one-third of the shares is correct. Shareholders are not free to do with the company or its assets. Shareholders cannot leave the chairman because the company owns the chairman, not the shareholder. This is called “the separation of ownership and control.”
So, if they are not actually what we think of ownership, what is the use of stocks? Having stocks gives you the right to vote at a general meeting, receive dividends at the time of distribution (this is the company’s profit), and it gives you the right to sell the shares to others. If you own a majority of the shares, your voting rights increase so that you can indirectly control the direction of the company by appointing its board of directors.
This becomes most apparent when a company buys another company: the acquiring company does not buy buildings, chairs, employees; it buys all the shares. The board is responsible for improving the value of the company, usually by hiring a professional manager or a CEO or CEO.
For ordinary shareholders, the inability to manage the company is not a big deal. The importance of becoming a shareholder is that you are entitled to a portion of the company’s profits, which, as we will see, is the basis for the value of the stock. The more stock you have, the more profit you get. However, many stocks do not pay dividends, but reinvest profits in the company’s development. However, these retained earnings are still reflected in the value of the stock.
Stocks – sometimes referred to as stocks or stocks – are issued by companies to raise funds to develop business or undertake new projects. There is an important difference between whether a person buys shares directly from the company when issuing shares (in the primary market) or another shareholder (in the secondary market). When a company issues shares, it does so in exchange for money.
Companies can raise funds by borrowing directly from banks or by issuing bonds (called bonds). Bonds are fundamentally different from stocks in many ways. First, the bondholder is the creditor of the company and is entitled to interest and repayment of principal. In the case of bankruptcy, creditors have priority over other stakeholders, and if the company is forced to sell assets to repay the debt, the creditor will be ranked first. On the other hand, shareholders are at the end, and if they go bankrupt, they usually don’t receive anything, or just pennies in dollars. This means that the stock itself has a higher risk bond investment.
The same is true for the upside: bondholders are only entitled to the return of the interest rate agreed upon by the bond, and the return that shareholders can enjoy to increase profits is theoretically unlimited. The greater risk that stocks bring is usually the return of the market. Historically, the annualized return on the stock market is about 8-10%, and the bond return rate is 5-7%.