What Owning a Stock Actually Means

Most people realize that owning a stock means buying a percentage of ownership in the company, but many new investors have misconceptions about the benefits and responsibilities of being a shareholder.

Many of these misconceptions stem from a lack of understanding of the amount of ownership that each stock represents. For large companies, such as Apple (AAPL) and Exxon Mobil (XOM), one share is merely a drop in the pond. Even if you owned $1 million worth of shares, you’d still be a small potato with very little equity in the company.

So, what does this mean? Let’s take a look at three of the biggest misconceptions about being a shareholder.

Misconception No. 1: I Am the Boss

First of all, you’re better off not thinking that you can bring your share certificates to the corporate headquarters to boss people around and demand a corner office. As the stock owner, you’ve placed your faith in the company’s management and how it handles different situations. If you are unhappy with the management, you can always sell your stock, but if you are happy, you should hold onto the stock and hope for a good return.

Furthermore, next time you are pondering whether you’re the only person worried about a company’s stock price, you should remember that many of the senior company executives (insiders) probably own as many, if not more, shares than you do.

This isn’t a guarantee that the company’s stock will do well, but it is a way for companies to incentivize their executives to maintain or increase the stock’s price.

Even though you can’t directly manage the company with your stocks, you can vote for the directors who can if your stock has voting rights. These are the people who appoint upper management, cascading down to lower management and employees. Thus, as an owner of common stock, you do get a bit of a say in controlling the shape and direction of the company, even though this “say” doesn’t represent direct control.

Misconception No. 2: I Get a Discount on Goods and Services

Another misconception is that ownership in a company translates into discounts. Now, there are definitely some exceptions to the rule. Berkshire Hathaway (BRK/A), for example, has an annual gathering for its shareholders where they can buy goods at a discount from Berkshire Hathaway’s held companies. Typically, however, the only thing you get with the ownership rights of a stock is the ability to participate in the company’s profitability.

It might seem like getting a discount is always advantageous, but the reality is more complex. Let’s look at an example of B’s Chicken Restaurant (owned by a small group of friends) and C’s Brewing Company (owned by millions of different shareholders). Because only a few people own B’s Chicken Restaurant, the discount would only be a small portion of the restaurant’s income and revenue, which the owners would bear.

For C’s Brewing Company, the loss in income and revenue would also be borne by the owners (the millions of shareholders). Since revenue is the main driver of stock price and the loss from a discount would mean a drop in stock price, the negative impact of a discount would be more substantial for C’s Brewing. So, even though an owner of stock may have saved on a purchase of the company’s goods, they would lose on the investment in the company’s stock. Thus, the discount isn’t nearly as good as it initially sounds.

Misconception No. 3: I Own the Chair, the Desk, the Pens, the Property, etc.

As an investor, you own a portion of the company (no matter how small that portion is); however, this doesn’t mean that you own property. Let’s go back to B’s Chicken Restaurant and C’s Brewing Company.

Often, companies will have loans to pay for property, equipment, inventories, and other things needed for operations. Suppose B’s Chicken Restaurant received a loan from a local bank under certain conditions whereby the equipment and property are used as collateral. For a large company like C’s Brewing Company, the loans come in many different forms, such as through a bank or from investors by means of different bond issues. In either case, the owners must pay back the debtors before getting any money back.

For both companies, the debtors—in the case of C’s Brewing Company, this is the bank and the bondholders—have the initial rights to the property, but they typically won’t ask for their money back while the companies are profitable and show the capacity to repay the money. However, if either of the companies becomes insolvent, the debtors are first in line for the company’s assets. Only the money left over from the sale of the company assets is distributed to the stockholders.

The Bottom Line

Owning stock can be a valuable investment, but it’s important to understand what that actually means and what the limitations are. By clearing up any misconceptions, you can set realistic expectations and make better-informed decisions for your portfolio.