What owning a stock means

If you have never bought a stock, the word can sound like a bet or like jargon. The idea underneath is ordinary: a share of stock is a small piece of ownership in a real company.

This lesson covers what that ownership gives you, what it does not give you, why companies sell shares at all, and where shareholders stand if the business fails.

A share is one equal slice of a company's ownership

A company that issues stock divides its ownership into units called shares. If you hold some of them you are a shareholder, one of the owners, in proportion to how many shares you hold out of the total.

That total is called shares outstanding. Holding 10 shares of a company with 1,000 shares outstanding means you own 1 percent of it. Holding 10 shares of a company with 10 million shares outstanding means you own a tiny fraction of 1 percent.

Ownership gives you a claim on profits and value, and usually a vote

The first thing a share gives you is a claim on your proportional part of what the company earns and what it is worth, but only after everyone with a prior claim is paid: employees, suppliers, lenders, tax authorities. Shareholders come last, which is why their claim is called a residual claim.

Some companies pay out part of their profits in cash, called a dividend, as a set amount per share. The board of directors, elected by shareholders, decides whether to pay one, and a dividend can be cut or stopped.

Here is the arithmetic. Imagine a company with 1,000 shares outstanding and you hold 10, so you own 1 percent. Over a year it earns $100,000 after all costs and taxes, and the board decides to pay out $50,000 and keep $50,000 in the business.

The payout works out to $50 per share, so your 10 shares bring you $500 in cash. The $50,000 kept inside the company never reaches your pocket. It may make the company more valuable over time, and that may or may not show up in what buyers will pay for a share.

The second thing a share usually gives you is a vote. Common stock, the ordinary kind, typically carries one vote per share on questions put to shareholders, such as electing the board of directors. Some companies issue classes of shares that carry more votes per share, or no vote at all.

Owning shares does not put you on the hook for the company's debts. If the business borrows and cannot repay, lenders cannot come after you: the most you can lose is what you paid.

Ownership does not give you control or a guaranteed return

You do not get a say in daily decisions. Hiring, pricing and budgets are set by managers, who answer to the board. With 1 percent of the votes, or a far smaller slice, your vote will rarely change an outcome.

You also do not get to use the company's property. Owning shares in an airline does not entitle you to a seat.

And there is no guaranteed return. A share is worth what another buyer will pay at the moment you want to sell, which can be more or less than you paid, and the company is generally under no obligation to buy it back. Prices move for reasons that have nothing to do with the company, and a share can lose most or all of its value.

Companies sell shares to raise money they never have to repay

A company that needs money to build a factory or hire staff has two broad options. It can borrow, which means repaying the money with interest on a schedule. Or it can sell a slice of its ownership, which brings in cash it never has to repay.

That second route is not free. The original owners give up part of every future profit and part of the control, and selling shares to the public brings rules from the Securities and Exchange Commission, the federal agency that regulates US securities markets, including regular public financial reporting.

If the company fails, shareholders are paid last

When a company cannot pay its debts, it may end up in bankruptcy, where claims are settled in an order set by law. Lenders and bondholders come first, holders of a class called preferred stock come after them, and common shareholders come last.

In practice common shareholders often receive nothing and the shares end up worthless. That is the main risk of owning a piece of a single company, and it is one reason investors often spread money across many companies instead of a few. How much risk of that kind fits your situation depends on your circumstances, and a licensed professional can help with individual decisions.

What to remember

• A share is a slice of ownership, measured as your shares divided by the total shares outstanding.
• Ownership gives you a claim on profits and value after everyone else is paid, and usually one vote per share.
• It does not give you control over daily decisions, use of company property, or any guaranteed return.
• Companies sell shares to raise money they never repay, giving up ownership and some control instead.
• If the company fails, common shareholders are paid last and often get nothing.