What Are Shares?
Shares are units of equity ownership in a corporation. For some companies, shares exist as a financial asset providing for an equal distribution of any residual profits, if any are declared, in the form of dividends. Shareholders of a stock that pays no dividends do not participate in a distribution of profits. Instead, they anticipate participating in the growth of the stock price as company profits increase.
Shares represent equity stock in a firm, with the two main types of shares being common shares and preferred shares. As a result, "shares" and "stock" are commonly used interchangeably.
- 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 capital (VC) investors. If the company continues to grow, it may seek to raise additional equity capital by selling shares to the public via an initial public 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 preemptive 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.
Physical paper stock certificates have been replaced with electronic recordings of stock shares. The issue and distribution of shares in public and private markets are 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.