A share is a unit of ownership of a corporation. When a corporation is created, the creators of the business will issue a certain amount of shares or ownership units in the company. The number of shares issued can be ten or ten million, whatever the original owners of the company wish.
A corporation offers shares to raise money or capital to invest in the business. In return for cash, the owners are selling off individual units of ownership in the company. For example, a new corporation may issue 1,000 shares and sell half of them to one person for a certain value. In that case, the person would own 50% of the company.
There are many different categories of shares that offer different share benefits. Some shares have the power to allow the owner of the share to receive dividends from the corporation, which is part of the company’s profits. Others are just a straight-up ownership share with no profit sharing. All shares have voting rights, but some categories of shares have special voting rights. A share is often commonly referred to as a stock, which is why they call it the stock market, where shares in public companies are bought and sold daily.
The two major share categories are called common and preferred.
Common shares or common stock are ownership shares in a corporation with no extra benefits other than an ownership interest and a voting interest at yearly shareholder meetings. Common shares provide an ownership interest in the company and a right to receive dividends when they are approved by the company, but they also receive value if the individual share price of a company rises when the company becomes more valuable.
Preferred shares will usually offer the owners of the shares a set amount in payment when the shares are sold. Preferred shares are less risky because they take precedence over common shares if the company has to declare bankruptcy and a payout to shareholders is made. Preferred shareholders get paid first over common shareholders.
All corporations will issue shares to investors, but some companies are private and some companies are public.
Private companies are when a small number of people or entities own the shares. Public companies are those that go through an IPO (initial public offering) and offer to sell shares to the general public on the various stock exchanges.
“Going public” is a way for a private company to raise more money for investment back into the company. When companies go public and sell shares to the public, they are subject to different laws and regulations and have more restrictions on the actions of the CEO and board of directors. Also, a public company is subject to the votes of all of the shareholders at a yearly shareholders meeting. So, in theory, various shareholders could join together and vote to change aspects of the business, such as the board of directors and other management and business issues. Public company stock is also bought and sold on the various stock exchanges.
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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