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Share

A share is a single unit of ownership in a company.

Expanded Definition

Ownership

Companies may be owned in different ways. They can be sole proprietorships run by a single person. Or they can be partnerships or they can be corporations.

The latter can be owned by just a few people or by many people. In each case, though, the owners own a certain percentage of the company -- their share. If the company can ultimately be divided into 1,000 individual units, then the person who owns 250 of them owns 25% of the company. The person who owns 10 owns 1% and so on. They own 10 shares out of 1,000.

Large public corporations have the ability (set forth in the articles of incorporation) of dividing themselves into millions, even billions, of individual units of ownership or shares. These are then sold in an initial public offering (IPO -- when the company first goes public) or in a secondary offering. The money raised is used by the company for whatever its management decides.

Once the share is sold to somebody, that person can then sell it in a secondary market to somebody else. This is what is usually happening when you buy or sell shares through your broker. You're buying part ownership in the corporation from somebody else, or selling your ownership to somebody else. Usually that "somebody else" is another person, but it can also be a mutual fund, a hedge fund, a pension fund, or sometimes the original corporation (when it buys shares back). The company doesn't get any of the money from all the subsequent buying and selling of its shares.

Share ownership rights and responsibilities

Shares can be owned by individuals, corporations, or other entities. When you own a share you become a part-owner (shareholder) of a company and your rights include:

  • Receiving any dividends paid on each share that you own.
  • Receiving a copy or summary of the company’s annual report and financial statement(s) well as any other shareholder communications.
  • Attending, speaking, and voting at general meetings of the company. Including voting on directors and, in some companies, compensation for top executives. Fools like it when stockholders get a say in compensation.

Owning Google shares does not, however, mean you can hold your family reunion at the headquarters of which you are in some technical way a part-owner, but you also don't risk losing all your possessions if the company gets sued.

Types and classes of shares

There are a variety of types of shares, including common stock and preferred stock. As the name implies, owners of the latter go further up the list than owners of the former when something like bankruptcy happens.

Some companies also have different classes of shares. In Warren Buffett's Berkshire Hathaway, for example, Class A shares trade at approximately 30-times the price of the Class B shares because the company has stated that one A share can be converted into 30 B shares. Shareholders in the two classes have different voting rights.

Other times, different classes arise from the way the company went public. For instance, Chipotle Mexican Grill has two classes (CMG -- the A shares-- and CMG-B). The first was when McDonald's sold part of its original ownership during the IPO and the second came about when McDonald's sold the rest of its ownership stake some months later.

Hamsters and valuation

The buying and selling of shares is what fuels the markets. The hamsters turning the wheels are the men and women in blazers who run around like sugar-addled toddlers, chasing the shares and the money they represent.

When evaluating an investment you need to know how many shares outstanding a company has, how that number has fluctuated over the years, whether stock splits or buybacks drastically changed the number. It might seem great if a stock split increases your shares from 1,500 at $32 to 3,000 at $16, but if things go sour and the share price then drops from $16 to $2, it's not so good.

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