What Does It Mean to Own Stock?
What does it mean to own stock? Owning stock means being one of the owners of a company. Company owners are assigned ownership units called shares.3 min read
What does it mean to own stock? Owning stock means being one of the owners of a company. Company owners are assigned ownership units called shares. The number and importance of shares an owner has depend on how soon and how much they invested in the company. A person can own stock by starting a company, buying shares in an already established company, or by buying a group of shares in a mutual fund or index.
What Is Stock?
Companies are independent entities. They pay taxes, borrow money, and can be sued. Big corporations are typically owned by thousands of entities. To streamline the process of profit and loss sharing, all entities that own a company are issued shares that correspond to the amount of money they invested in the company. A basic unit of company ownership is called a share, and owning a piece of a company can be described as owning stock.
Stockholders have several rights:
- They can attend company shareholder meetings.
- Shareholders have the right to receive dividends when they are distributed. Dividends are basically profits of the company.
- Some shareholders can vote in company shareholder meetings. Generally, the more shares a person owns, the more voting rights they have. However, not all shareholders in a company have voting rights.
- Shareholders have a right to sell their shares.
Risks Associated With Owning Stock
Owning shares in a company is normally associated with various risks:
- There's no guarantee that the company will pay out dividends every year. Even companies that make profits every year do not give out dividends regularly but instead reinvest the profits.
- The hope of most shareholders when they buy stock is that the value of their investment will go up with the time. However, the value of the shares sometimes goes down. Even owners of well-performing companies will only get substantial gains over a number of years.
Types of Businesses Whose Stock You Can Own
- Limited liability companies (LLC): The ownership interest in an LLC is technically not stock. The state laws governing LLCs as well as their bylaws limit the ability of owners to sell their ownership interest, which makes LLCs an undesirable business type for many investors.
- C corporations: C corporations are the traditional form of corporation. These corporations typically have thousands of owners. The C corporation is the investment business of choice for most shareholders because buying and selling stock is easy. Typically, in C corporations, shares change hands several times every day.
- S corporation: The S corporation was brought into existence in the 1960s to reduce the tax burden on owners of small corporations. S corporation ownership is limited to U.S. persons. Such companies can have a maximum of 100 shareholders. These limitations discourage many investors from acquiring S corporation stock.
How to Obtain or Sell Stock
There are a number of stockbrokers and stock exchanges that can facilitate the exchange process. The most famous stock markets in the United States are the New York Stock Exchange and the NASDAQ. You can acquire or sell stock in the following ways:
- Opening a company: This is one of the hardest ways to own stock because of the risks associated with founding a company. To start a company, you have to follow the procedures in your home state.
- Buying company stock: Buying stock is much easier than starting your own company. All that's needed is to identify pre-existing companies that have growth potential and then invest in them. Owners of publicly traded companies are allowed to sell stock at any time. Investing all your money in one company is risky because you stand to lose all the money should the company stock tumble or if the company files for bankruptcy. A number of stock mutual funds have been developed to try and reduce the risks associated with investing in one company.
- Investing in a mutual fund: A mutual fund is a group of stocks that a fund manager chooses. When you invest in a mutual fund, the fund manager apportions your money into shares from different companies.
- Buying stock indexes: Several stock indexes have been developed to mitigate the risk of owning stock. Stock indexes are similar to mutual funds but have no stock managers. As is the case with mutual funds, it is hoped that the poor performance of the stock of one company would be covered up by profits from the stock of other companies.
If you need help with stock ownership, including legal help with starting a company and buying or selling stock, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.