A share is a basic unit (smallest unit) of investment in a company. When you buy shares, you become a part-owner of a company. The number of shares you own, determines your portion of ownership in the company i.e. the more shares that you own, the greater the portion of the company you own. Each share represents a portion of ownership of a company, normally entitling the holder to vote on important corporate matters and to receive dividends if dividends are paid. Investors who purchase shares are termed “shareholders”.
Shareholders (investors in a company) share in the good (success) of the business and also the misfortunes (failures) of the companies they are invested in. Shareholders can earn a lot if the company is successful, but they also stand to lose their entire investment if the company is not successful.
A very important feature of a stock is its limited liability, which means that, as an owner of stock, you are not personally liable if the company is for example not able to pay its debts. Then maximum that a stock owner stand to lose, even if the company goes bankrupt, is the value of his / her investment in the company.
Investors will invest (buy shares) in a company for two reasons:
- To earn income from their shareholding in the company
- The potential increase in the price of the shares and the potential capital gain (profit) they can make by selling their shares for a price higher than what they paid for it
Investors buy shares of a company in the expectation that the company will grow its business and be successful. The share prices of successful companies normally increase and profits are distributed to shareholders in the form of dividends.
The income (share of the profits) which a shareholder earns from owning shares in a company is called a dividend. Profits of a company is available to grow the business or for distribution to the shareholders. Companies are however not obliged to pay dividends and the board of directors may decide to rather retain the profits in the company and to use the profits to grow the business further. Shareholders will receive dividends if a company’s board of directors declare that the company has made sufficient profits and that some of the profits will be paid to shareholders. Shareholders have a right to a share of that profit in proportion to the amount of shares which they hold.
The share prices of very successful and profitable companies will increase in value and the potential gain from share price appreciation far outstrips the potential for income from dividends. Many investors will therefore buy the shares of a company in the expectation of capital gains that can be realized from selling their shares at a later date at a price higher than the price at which they bought the share.