What Are Shares?
Shares are units of equity ownership interest in a corporation that exists as a financial asset that provide for an equal distribution in any residual profits, if any are declared, in the form of dividends. Shareholders may also enjoy capital gains if the value of the company rises.
- Shares represent equity ownership in a corporation or financial asset, owned by investors who exchange capital in return for these units.
- Common shares enable voting rights and possible returns through price appreciation and dividends.
- Preferred shares do not offer price appreciation but can be redeemed at an attractive price and offer regular dividends.
- Most companies have shares, but only the shares of publicly-traded companies are found on stock exchanges.
When establishing a corporation, owners may choose to issue common stock or preferred shares to investors. Companies issue equity shares to investors in return for capital, which is used to grow and operate the firm. Unlike debt capital, obtained through a loan or bond issue, equity has no legal mandate to be repaid to investors, and shares, while they may pay dividends as a distribution of profits, do not pay interest. Nearly all companies, from small partnerships or LLCs to multinational corporations, issue shares of some kind. Shares of privately-held companies or partnerships are owned by the founders or partners. As small companies grow, shares are sold to outside investors in the primary market. These may include friends or family, and then angel or venture (VC) investors. If the company continues to grow, it may seek to raise additional equity capital by selling shares to the public on the secondary market via an initial share offering (IPO). After an IPO, a company's shares are said to be publicly traded and become listed on a stock exchange.
Most companies issue common shares. These provide 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 shareholders of record in a company to vote on certain corporate actions, elect members to the board of directors, and approve issuing new securities or payment of dividends. In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.
In comparison, 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, a dividend that is 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. Because preferred shareholders have priority in repayment upon bankruptcy, they are less risky than common shares. That said, preferred shares typically do not come with any voting rights.
Physical paper stock certificates have been replaced with electronic recording of stock shares. The issue and distribution of shares in public and private markets is overseen by the Securities and Exchange Commission (SEC) and trading on the secondary market of shares by the SEC and FINRA.
Shares represent the corporation's owners' residual claim on assets after all obligations and debts have been paid.
Authorized and Issued Shares
Authorized shares comprise the number of shares a company’s board of directors may issue. Issued shares comprise the number of shares that are given to shareholders and counted for purposes of ownership.
Because shareholders’ ownership is affected by the number of authorized shares, shareholders may limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they conduct a meeting to discuss the issue and establish an agreement. When shareholders agree to increase the number of authorized shares, a formal request is made to the state through filing articles of amendment.
Example of Shares
Investors buy shares of companies that they believe will grow and hope to capture some of those capital gains as investors. As the 10-year bull market that began following the 2008 financial crisis stretched on, shares of companies continually reached new highs through 2017. So-called FAANG (Facebook, Apple, Amazon, Netflix, and Google) tech stocks led the market rally, as their share prices soared by double digits in 2017 on strong earnings results. The increasing price meant that investors were willing to pay more to own shares of these companies.
All told, the shares of the companies in the S&P 500 Technology Select Sector traded up 34.57% in 2017 and continued rising through 2019. In 2020, the shares of companies on the stock market began to experience volatility due to public health, economic, and political uncertainty around the COVID-19 pandemic.