What owning stocks actually means

Most people realize that owning stock means buying a percentage of a company, but many new investors have a misconception 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 big companies like Apple (AAPL) and Exxon Mobil (XOM), one share is just a drop in the ocean. Even if you own $1 million worth of stock, you’re still a little potato with little equity in the company.

So what does this mean? Let’s take a look at the three biggest misconceptions about being a shareholder.

key takeaways

  • Shareholders own shares in the company, but the level of ownership may not provide the benefits and responsibilities sought.
  • Most shareholders have no direct control over the operations of the company, although some have voting rights that confer certain powers, such as voting for board members.
  • Being a shareholder does not mean you are entitled to discounts or can seize assets and property at will.

Misunderstanding 1: I am the boss

First of all, you better not think you can take your stock to corporate headquarters to lead the people around and ask for a corner office. As the owner of the stock, you have confidence in the management of the company and how it handles different situations. You can always sell your stock if you are not satisfied with management, but if you are satisfied, you should hold the stock and hope for a good return.

Also, the next time you’re considering whether you’re the only one worried about a company’s stock price, you should keep in mind that senior executives (insiders) at many companies probably own as much stock as you, if not more.

This isn’t a guarantee that a company’s stock will perform well, but it’s a way for a company to incentivize its executives to maintain or increase the stock price. Insider ownership is a double-edged sword, though, as executives may get involved in some interesting business, artificially inflate stock prices, and then quickly sell their personal holdings for profit.

Even though you cannot directly manage the company with your stock, if your stock has voting rights, you can vote for the directors who can manage the company. These people typically employ upper management and lower management hire subordinate employees. So, as the owner of common stock, you do have some say in controlling the shape and direction of the company, although this “speak” does not imply direct control.

According to a 2020 Gallup poll, 55% of Americans own stocks.

Myth #2: I get discounts on goods and services

Another misconception is that company ownership translates into discounts. Now, there are definitely some exceptions to that rule. For example, Berkshire Hathaway (BRK/A) hosts an annual gathering for its shareholders, where they can buy goods at discounted prices from companies controlled by Berkshire Hathaway. Often, however, the only benefit you have with stock ownership is the ability to participate in the company’s profitability.

Why discounts are causing you pain Well, this answer might be a bit complicated. After some thought, you probably don’t want that discount. Let’s look at an example of B’s ​​Chicken Restaurant (owned by a small group of friends) and C’s Brewing Company (owned by millions of different shareholders). Because only a handful of people own B’s Chicken Restaurant, the discount is only a fraction of the restaurant’s revenue and income, and the owners will bear it.

For C’s Brewing Company, the loss of revenue and income will also be borne by the owners (millions of shareholders). Since revenue is the main driver of the share price, and a loss of the discount would mean a lower share price, the negative impact of the discount is more significant for C’s Brewing. Therefore, even though the stock owner may have saved money on the purchase of the company’s goods, they will lose money on their investment in the company’s stock. So the discount isn’t as good as it first sounds.

Myth #3: I own chairs, tables, pens, property, etc.

As an investor in a company, you own a part of the company (however small that part may be); however, this does not mean that you own the property of the company. Let’s go back to B’s Chicken Restaurant and C’s Brewing Company.

Many times, companies will have loans to pay for property, equipment, inventory, and other things needed to operate. Suppose B’s Chicken Restaurant obtains a loan from a local bank under certain conditions, with equipment and property used as collateral. For large companies like C’s Brewing Company, loans come in many different forms, such as through banks or investors through different bond issuances. In either case, the owner must repay the debtor before any money can be recovered.

For both companies, the debtors—in C’s Brewing Company’s case, the banks and bondholders—have the initial rights to the property, but they typically don’t make a profit in the company and show the ability to pay back the money. However, if any company goes bankrupt, the debtor first gets the company’s assets. Only the money left over from the sale of the company’s assets is distributed to shareholders.

bottom line

Hopefully we can clear up any misconceptions some shareholders have about ownership. The next time you’re considering taking your stock to the nearest McDonald’s (MCD) for a discount on Happy Meals, trying to fire an employee after refusing to give you, and then finally walking out with a McFlurry machine in disgust, you should remind yourself about ownership common misconceptions.

READ ALSO:   Registered Investment Advisor (RIA)
Share your love