05/01/2023, 11:29 What Owning a Stock Actually Means
INVESTOPEDIA INVESTING
What Owning a Stock Actually Means
By BRIAN BEERS Updated January 19, 2022
Reviewed by ANDY SMITH
Fact checked by SUZANNE KVILHAUG
Most people realize that owning a stock means buying a percentage of
ownership in the company, but many new investors have misconceptions 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 large companies, such as Apple (AAPL) and
Exxon Mobil (XOM), one share is merely a drop in the pond.Even if you owned
$1 million worth of shares, you'd still be a small potato with very little equity in
the company.
So what does this mean? Let's take a look at three of the biggest
misconceptions about being a shareholder.
KEY TAKEAWAYS
Stockholders own shares of a company, but the level of ownership may
not present the benefits and responsibilities sought after.
Most shareholders have no direct control over a company's operations,
although some have voting rights affording some authority, such as
voting for the board of directors members.
Being a shareholder does not mean that you are entitled to discounts
or can seize assets and property at will.
Misconception No. 1: I Am the Boss
First of all, you're better off not thinking that you can bring your share
certificates into the corporate headquarters to boss people around and demand
a corner office. As the owner of the stock, you've placed your faith in the
company's management and how it handles different situations. If you are not
happy with the management, you can always sell your stock, but if you are
happy, you should hold onto the stock and hope for a good return.
Furthermore, next time you are pondering whether you're the only person
worried about a company's stock price, you should remember that many of the
senior company executives (insiders) probably own as many, if not more, shares
than you do.
This isn't a guarantee that the company's stock will do well, but it is a way for
companies to give their executives an incentive to maintain or increase the
stock's price. Insider ownership is a double-edged sword, though, because
executives may get involved in some funny business to artificially increase the
stock's price and then quickly sell out their personal holdings for a profit.
Even though you can't directly manage the company with your stocks, vote for
the directors who can if your stock has voting rights. These are the people who
typically hire upper management, which hires lower management, which hires
subordinate employees. Thus, as an owner of common stock, you do get a bit of
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a say in controlling the shape and direction of the company, even though this
'say' doesn't represent direct control. [1]
FAST FACT
55% of Americans own stock according to a 2020 Gallup Poll. [2]
Misconception No. 2: I Get a Discount on Goods and Services
Another misconception is that ownership in a company translates into
discounts. Now, there are definitely some exceptions to the rule. Berkshire
Hathaway (BRK/A), for example, has an annual gathering for its shareholders
where they can buy goods at a discount from Berkshire Hathaway's held
companies. Typically, however, the only thing you get with the ownership rights
of a stock is the ability to participate in the company's profitability.
Why would it hurt for you to get a discount? Well, this answer can get a little
complicated. After some thought, you probably would not 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 few people own B's Chicken Restaurant, the
discount would only be a small portion of the restaurant's income and revenue,
which the owners would bear.
For C's Brewing Company, the loss in income and revenue would also be borne
by the owners (the millions of shareholders). Since revenue is the main driver of
stock price and the loss from a discount would mean a drop in stock price, the
negative impact of a discount would be more substantial for C's Brewing. So,
even though an owner of stock may have saved on a purchase of the company's
goods, they would lose on the investment in the company's stock. Thus, the
discount isn't nearly as good as it initially sounds.
Misconception No. 3: I Own the Chair, the Desk, the Pens, the
Property, etc.
As an investor in a company, you own a portion of the company (no matter how
small that portion is); however, this doesn't mean that you own property of the
company. Let's go back to B's Chicken Restaurant and C's Brewing Company.
Quite often, companies will have loans to pay for property, equipment,
inventories, and other things needed for operations. Let's assume B's Chicken
Restaurant received a loan from a local bank under certain conditions whereby
the equipment and property are used as collateral. For a large company like C's
Brewing Company, the loans come in many different forms, such as through a
bank or from investors by means of different bond issues. In either case, the
owners must pay back the debtors before getting any money back.
For both companies, the debtors—in the case of C's Brewing Company, this is
the bank and the bondholders—have the initial rights to the property, but they
typically won't ask for their money back while the companies are profitable and
show the capacity to repay the money. However, if either of the companies
becomes insolvent, the debtors are first in line for the company's assets. Only
the money left over from the sale of the company assets is distributed to the
stockholders. [3]
The Bottom Line
Hopefully, we've been able to dispel any misconceptions that some
stockholders have about the powers of ownership. Next time you think about
taking your stock certificate into the nearest McDonald's (MCD) to get a discount
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05/01/2023, 11:29 What Owning a Stock Actually Means
on a Happy Meal, attempt to fire the employee after refusing to give it to you,
and then finally walk out in disgust with a McFlurry machine, you should
remind yourself of the common misconceptions about ownership powers.
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