Stock Market Foundations · Stocks Explained
Start with the business
A common share represents an ownership interest in a company. Its value depends on what owners may receive from the business over time and what another investor will pay for that claim. It does not mean that you personally own a particular machine, office or amount of cash in the company.
Common shareholders generally receive what remains after obligations to creditors and senior claims. Dividends are not guaranteed. Voting and economic rights can differ between share classes, so identify the actual security before comparing prices.
Calculate your ownership
Imagine a company with 1,000,000 ordinary shares outstanding. Owning 2,000 shares represents 0.2% of that class. If each share trades at $15, the quoted value of your holding is $30,000 and the quoted equity value of the company is $15 million. These are hypothetical figures.
The $15 million market capitalisation is not the same as the cash inside the company. It is the market price of all outstanding shares at that moment. The business could hold much less cash and still have valuable operations.
Separate fundraising from trading
When a company issues new shares, it can receive capital. When an investor buys existing shares from another investor on an exchange, the seller generally receives the proceeds. The company does not receive the purchase price from every ordinary secondary market transaction.
The distinction explains why a rising share price can improve financing options without directly adding the same amount to the corporate bank account.
Read the security before the story
Record the issuer, exchange, currency, share class and basic voting rights. Check whether you are viewing common stock, preferred stock, a fund or a depositary receipt. Similar names can conceal different claims.
Then describe what the company sells and who pays it in one sentence. If you cannot explain that economic activity, the price chart alone is not a sufficient starting point.
Try it yourself
A company has 4 million shares outstanding. You own 10,000 shares. What percentage do you own, and does a price increase put cash into the company?
Show the worked answer
Your ownership is 10,000 divided by 4,000,000, or 0.25%. A price increase in secondary market trading does not itself transfer cash to the company.
Further reading
Educational material. Examples are hypothetical and do not recommend a security or a personal allocation.
