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Investment Insights, Inc.

What is a Stock?

Partial Ownership and Income.

After doing a quick Google search, I found this commonly used definition of a stock: ownership share in a company. Others have described stock as a way to have part ownership of a business that someone else manages for you.

But do these definitions tell the full story?

If I take a computer monitor home from my office, no one will dispute my right to do so. It’s my business. But if I go to into the offices of a major corporation and show them documentation that I own stock in the company, can I take one of their computer monitors home? If they don’t laugh me out the door, they’ll probably call security.

In any case, my stock ownership is not going to give me the right to take any property home. So it seems I really don’t have part ownership in a business. What do I have?

Well, it turns out there are different entities and different kinds of ownership. What I have is stock in a corporation. In turn, the corporation owns the property, including the hypothetical computer monitor.

My stock ownership makes me a passive owner with beneficial rights to the income stream of the company. As a passive owner, my only power is to buy or sell my ownership as well as to vote once a year for board members, and sometimes on a few limited policy initiatives.

How that benefits me depends on decisions made by the active management of the company. They and the board of directors decide how the net income of the company is allocated, with some of it often invested into the business,some of it retained for reserves, and possibly some of it distributed to shareholders in the form of dividends.

As a shareholder, I have almost no say in these decisions or any of the thousands of other decisions made in the running of a business.

And yet, owning shares in companies can be thought of as participatory democracy. How can that be if I have no say in the running of the company? Because essentially, I can “vote” by selling or buying shares of the company. When I take those actions, I have an effect on the price of those shares, albeit a very small and temporary one. This is actually very important.

When you look at the compensation structure of key officers of most public companies, it usually involvessome combination of salary and bonuses. Those bonuses are often partially in the form of stock or stock options. In other words, the officers of the company personally benefit when the price of the stock goes up, and they personally lose when the price goes down.

When I cast a political vote at the ballot box, my individual vote doesn’t mean much, but in combination with thousands and millions of others, we do make changes.

In the political sector, we only get to cast our votes once every few years, but in the stock market we can vote every single day, and many times per day if we choose.

To my mind, that is democracy in action to a far greater degree than in our political system.

Coming back to the question of what you own when you buy a stock—you have part ownership of a business that someone else runsfor you. If the management does a good job, you can make money from their efforts.

Does that seem like a good deal to you? Because it sure seems like a good deal to me!

Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/ Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri .com.

These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees ofrisk. Investorsshould be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results. Indices mentioned are unmanaged and cannot be invested in directly.

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