Shareholder’s Basics

Shareholder’s Basics

A company is a person in the legal sense, thus the concept of limited liability, which means that in the case of bankruptcy only the company’s assets, but not the owner’s assets, are at stake. By the same token, it also means that a shareholder cannot be held responsible for the misdeeds of a company.

Stocks are shares of a company; a company issues shares when it first goes public (IPO – Initial Public Offering). A controlling interest is usually defined as owning upwards of 50% of shares outstanding plus one. The rule is one vote per share. The voters choose a Board of Directors, who then assigns a President; the primary responsibility of the Board of Directors is to ensure the company is making money for the owners (the shareholders).

On the one hand, stock splits keep the ratio constant but increase the overall number of shares outstanding. Splitting stock is done to keep the price per share within an affordable range, approximately between 20 and 40 U.S. dollars. Microsoft Corporation has often split stock since its inception.  On the other hand, dilution occurs when stocks are given to, for instance, a CEO but not to anyone else, therefore reducing others’ ownership percentage.

Ultimately stocks are bought for their dividends, the part of retained earnings a firm pays to its shareholders on a per share basis. Occasionally, the dividends are paid in stock and not in cash. By itself, the effect is meaningless since all participants get the same amount and the ratio is unchanged. But, this practice is usually implemented in one of two cases: either the company wants to pay a cash dividend but cannot (due to limited financial resources) or, there are some breakthrough advances coming up and since the price per share is expected to go up it is purely a commemoration.

Jamaica, Montego Bay. It’s fine to seek professional help, but I urge everyone – no matter how big their portfolio – to truly understand every suggestion they’re given before acting (Suze Orman). Illustration: Megan JorgensenPhoto by Elena

All public companies are regulated by the Securities Exchange Commission (SEC) and post their files in an orderly fashion online, these can be found on Edgar. Although there are many advantages to going public, the mandatory transparency would be detrimental to some companies and so these choose to remain private. Such is the case with many hedge funds. Only accredited investors can participate in hedge funds, for the protection of small investors. Hedging is an investing strategy of playing off two alternatives against each other.

Mergers and acquisitions are an important part of corporate finance, the branch of finance, in turn a subdivision of economics, which studies the management of wealth by corporations. Merging two smaller companies makes, obviously, a large company but the process can also be reversed as in spin-offs and carve-outs. In both a merger and an acquisition, the goal is to increase shareholder value by combining the separate values of each company. An acquisition is when a company buys another; a merger is a “merger of equals” in theory, but in practice often simply a friendly, mutually agreed on acquisition.

An alternative to holding stock is investing in bonds. Bonds are long and short-term debt, governmental bonds being considered the less risky. Unstable governments and cities are an exception; they fail to be riskless since they can go bankrupt