The Theoretical Background To Investing Shares And Stock

Investing in shares of stocks provide companies with equity necessary to expand their businesses and grow the economy. The theory behind investing in shares and stock is based largely on the principles of supply and demand. A company’s stock price is influenced by the demands of the shareholders and investors who determine the capitalization or value of the company.

Issuing Shares


When a company organizes, it authorizes a number of shares for the company. A portion of these authorized shares is offered to the public in an offering in order to obtain needed capital. The portion of authorized shares that are offered to be sold to the pubic are issued shares. Of those shares that are issued, some are traded on a public market such as the New York Stock Exchange (NYSE) or NASDAQ. Shares that are retained by the company to fund employee benefits and executive compensation programs are referred as treasury shares. The stock that trades on an exchange is an outstanding share. The sum of outstanding shares and treasury shares equals the issued shares for the company.

Ownership Rights


Shares of stock issued by a company represent a percentage of ownership. The percentage is based on the number of share that the company has outstanding. For example, a shareholder that owns 100,000 shares of a company with 1 million shares outstanding has a 10 percent ownership stake in the company.

Shares of ownership in a company come in the form of stock certificates. Although not issued physically but maintained in an electronic register that is kept by a registrar, the shares of stock gives the owner certain rights in the company. These rights include:

• Management rights
• Share in profits
• Anti-dilution privileges

Rights to Management


The owner of a share of stock has the right to vote on management issues of the company. This includes the selection of members of the board of directors or trustees for the company. Management decisions affect the way the company is run and how profitable it will be for shareholders. Since the reason behind investing has to do with making profits, a shareholder has a keen interest in participating in management decisions of the company. Shareholders do not run the day-to-day operations of the business but select directors who have oversight abilities.

Dividends

Shares of stock give the owner the right to dividends. Dividends represent the portion of profits that are earned by a company and distributed to its shareholders. Dividends are only distributed when declared by the company. If the owner has a cumulative preferred or preferred share of stock, they receive priority and preference in the payment of dividends over those individuals who own common shares of stock. A common stock shareholder however is the only one with the ability to vote on management issues.

Anti-Dilution


A shareholder maintains their proportionate share of ownership in a company, which cannot be diluted by the company. For example, if a company declares a stock dividend, which increases the number of shares outstanding, the company must adjust accordingly the shares of existing shareholders in order to maintain their percentage ownership of the company.

It is important to understand the theory to share and stock investing in order to make decisions that have a positive affect on our investment experience.

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