What Owning A Stock Actually Means
Most people realize that owning a stock means buying a percentage of ownership in the company, but many new investors have misconceptions about the benefits and responsibilities of being a shareholder. Many of these misconceptions stem from a lack of understanding of the amount of ownership that each stock represents. For large companies such as IBM (NYSE:IBM) and General Electric (NYSE:GE), one share is merely a drop in the pond. Even if you owned $1 million worth of shares, you'll still be a small potato with very little equity in the actual company. So what does this mean? Let's take a look.
Misconception No.1: I am the boss.
First of all, you're better off not thinking that you can bring your share certificates into the corporate headquarters to boss people around and demand a corner office. As the owner of the stock, you've placed your faith in the company's management and how it handles different situations. If you are not happy with the management, you can always sell your stock, but if you are happy, you should hold onto the stock and hope for a good return.
Furthermore, next time you are pondering whether you're the only person worried about a company's stock price, you should remember that many of the senior company executives, or insiders, probably own as many, if not more, shares than you do.
This isn't a guarantee that the company's stock will do well, but it is a way for companies to give their executives an incentive to maintain or increase the stock's price. Be careful though: insider ownership is a double-edged sword because executives may get involved in some funny business to artificially increase the stock's price and then quickly sell out the personal holdings for a profit.
Even though you can't directly manage the company with your stocks, if your stock has voting rights, vote for the directors who can. These are the people who typically hire upper management, which hires lower management, which hires subordinate employees. Thus, as an owner of common stock, you do get a bit of a say in controlling the shape and direction of the company, even though this say doesn't represent direct control. (To learn more, read Knowing Your Rights As A Shareholder.)
Misconception No.2: I get a discount.
Another misconception is that ownership in a company translates into discounts. Now, there are definitely some exceptions to the rule. Berkshire Hathaway (NYSE:BRK.A), for example, has an annual gathering for its shareholders where they can buy goods at a discount from Berkshire Hathaway's held companies. Typically, however, the only thing you get with the ownership rights of a stock is the ability to participate in the company's profitability.
Why would it hurt for you to get a discount? Well, this answer can get a little complicated. After some thought, you probably would not want that discount. Let's look at an example of Ben's Chicken restaurant (owned by Ben and a couple of his friends) and Cory's Brewing Company (owned by millions of different shareholders). Because only a few people own Ben's Chicken Restaurant, the discount would only be a small portion of the restaurant's income and revenue, which the owners would bear.
For Cory's Brewing Company, the loss in income and revenue would also be borne by the owners (the millions of shareholders), but, because revenue is the main driver of stock price and the loss from a discount would mean a drop in stock price, the loss from a discount would be more substantial for Cory's Brewing. So, even though an owner of stock may have saved on a purchase of the company's goods, he or she would lose on the investment in the company's stock. Thus, the discount isn't nearly as good as it initially sounds.
Misconception No.3: I own the chair, the desk, the pens, the property, etc.
As an investor in a company, you own a portion of the company (no matter how small that portion is); however, this doesn't mean that you own property of the company. Let's go back to Ben's Chicken Restaurant and Cory's Brewing Company. Quite often, companies will have loans to pay for property, equipment, inventories and other things needed for operations.
Ben's Chicken Restaurant received a loan from a local bank under certain conditions whereby the equipment and property are used as collateral. For a large company like Cory's Brewing Company, the loans come in many different forms, such as through a bank or from investors by means of different bond issues. In either case, the owners must pay back the debtors before getting any money back.
For both companies, the debtors - in the case of Cory's Brewing Company, this is the bank and the bondholders - have the initial rights to the property, but they typically won't ask for their money back while the companies are profitable and show the capacity to repay the money. However, if either of the companies becomes insolvent, the debtors are first in line for company's assets. Only the money left over from the sale of the company assets is distributed out to the stock holders.
Hopefully we've been able to dispel any misconceptions that some stock holders have about the powers of ownership. Next time you think about taking your stock certificate into the nearest McDonald's (NYSE:MCD) to get a discount on a Happy Meal, fire the employee after he refuses to give it to you, and finally walk out in disgust with a McFlurry machine, you should remind yourself of this article.