What Are Shares?

What Are Shares?

Let me explain shares to you directly: they are units of ownership in a company. You might hear 'shares' and 'stocks' used interchangeably, but technically, stock is the financial instrument a company issues, and a share is a single unit of that instrument.

Key Takeaways

Shares represent units of ownership in a corporation or financial asset, where investors provide capital in exchange for these units. Common stock shares give you voting rights and potential returns from price appreciation and dividends. Preferred stock shares don't offer price appreciation but can be redeemed at an attractive price and provide regular dividends. Many companies issue shares, but only those of publicly traded companies appear on stock exchanges.

Understanding Shares

When owners establish a corporation, they may issue stock to raise capital. They divide this stock into shares, which are sold to investors—typically investment banks or brokers—who then sell them to others, either individually or through mutual funds or exchange-traded funds.

Shares equate to ownership in a corporation. Since they represent ownership rather than debt, there's no legal obligation for the company to repay shareholders if the business fails. However, some companies pay dividends to shareholders, while others reinvest all revenues into operations, growth, and future security.

How Shares Are Issued and Regulated

A company's board of directors receives a specific number of authorized shares to issue. Issued shares are those actually sold to shareholders and counted for ownership. For instance, a corporation might authorize 10 million shares but issue only 8 million.

Shareholders' ownership depends on the number of authorized shares, so they may vote to limit it. If they decide to change the number, they meet, agree, and file articles of amendment with the state.

Publicly traded companies list shares on exchanges through an initial public offering (IPO), which is expensive, regulated, and lengthy, involving fundraising and regulatory scrutiny.

Private company shares often go to employees via stock options or incentives; they're regulated but usually not listed on exchanges. The SEC regulates share issuance and distribution in public and private markets, while the SEC and FINRA oversee secondary market trading.

Types of Shares

Any company can issue shares, but publicly traded ones often divide them into common and preferred types.

Common Stock Shares

Many companies issue common stock divided into shares, known as common shares. These give shareholders a residual claim on the company and its profits, offering growth through capital gains and dividends. They also include voting rights, allowing more control over the business.

These rights let shareholders vote on corporate actions, elect board members, and approve new securities or dividends. Common stock may include preemptive rights, letting shareholders buy new shares to maintain their ownership percentage.

Preferred Stock Shares

Preferred stocks divide into preferred shares, which unlike common shares, offer little market appreciation or voting rights. They have set payment criteria, like regular dividends, making them less risky.

In bankruptcy, preferred shareholders get paid before common shareholders but after bondholders, reducing risk further.

Benefits of Offering Shares

A company could issue equity as one ownership stake without dividing it, but there are clear reasons not to. Dividing into shares increases liquidity, providing an exit for founders and early investors by allowing sales on the open market—something harder with a single ownership claim.

Shares enable employee incentives, like stock options or restricted units, aligning interests with performance to attract and retain talent. They also diversify ownership, bringing diverse shareholders for balanced decisions and reducing control concentration, which supports good governance.

Fractional Shares

Fractional shares are parts of a full share. Traditionally, you buy whole shares, but fractional ones let you invest based on dollar amount. For example, with a $1,000 stock and $100 to invest, you get 0.1 shares. This makes investing accessible, especially for those with limited funds.

Not all brokers offer them, and there are limitations on available stocks. Fractional shareholders get proportional dividends but may lack voting rights, depending on the broker.

Shares of Stock and Market Capitalization

Market capitalization measures a company's stock market value, tied to its shares. Calculate it by multiplying outstanding shares by current price per share. Issuing more shares increases outstanding shares and, if price holds, market cap. Buybacks decrease it.

For example, with 100,000 shares at $50, market cap is $5 million. If price rises to $60, it's $6 million; adding 10,000 shares at $60 makes it $6.6 million. Company value lies in total shares times price, not just price per share—two companies at $100 per share differ if one has twice the shares.

That's why a company with more shares is larger, even at the same price.

Shares Authorized vs. Issued vs. Outstanding

Authorized shares are the maximum a company can legally issue. Issued shares are those sold or distributed, always equal to or less than authorized. Outstanding shares are those held by shareholders, equaling issued minus treasury stock.

For a startup with 100 million authorized, it might issue 50 million, repurchase 5 million as treasury, leaving 45 million outstanding.

The Bottom Line

Shares are units of stocks that represent ownership, sold to raise capital for research, expansion, or growth.