The concept of owning shares of a company can be a very abstract concept. Unlike owning a home that you live in, or a car that you drive daily, owning shares in a company does not entitle a person to claim ownership in the traditional sense, as with the home or car. Owning shares (stock) in a company entitles a person to a share of the ownership of the company, and therefore a claim on the company’s earnings. In some cases, owning shares also confers voting rights on company policies, and grants a claim on the company’s assets.
A simple breakdown will illustrate this concept clearly. When a business is organized and structured as a corporation (We’ll use ABC Corporation as an example), a specified number of shares, in the form of stock certificates, are authorized by the corporation to be issued to shareholders. Each stock certificate represents an equal share of the corporation ABD’s net worth. For example, let’s say ABC corporation is formed and is worth $100 (the numbers will be kept small for this example), and it issues 100 shares of ABC stock. That makes the book value of each ABC share worth $1. If ABC corporation now takes these shares and offers to sell them to the public, any price that is paid above (or below) $1 is considered market value. As ABC Corporation conducts its operations and realizes profits, it will periodically distribute these profits equally to the shareholders in the form of dividends. To further the example, if ABC makes $200 of profit in a dividend distribution period, each shareholder will receive $2 for every share that they own.
For typical investors, ownership of shares does not allow for direct input into day-to-day operations of the corporation. However, owning certain types of shares does allow the shareholder to vote on a one vote-per-share basis, on policy issues set forth by the management of the corporation to voters. There are some exceptions to this arrangement. In most cases, many of the high-level executives of a corporation are the original founders. Consequently, they own a significant portion of the corporation’s outstanding shares, and therefore a controlling interest in the corporation. These shareholders are able to control the policies and direction of a corporation by exerting their extensive voting rights, hence their “controlling interest.” Also, shareholder that hold a controlling interest in a corporation are obliged to comply with additional government regulation.
Anyone can own shares in a publicly traded corporation by simply purchasing them in an open market. So long as the shares are owned directly, the investor is entitled to all the aforementioned rights and privileges. When it comes to voting rights, the registered owner of the shares at the time of the vote is entitled to cast votes. When ownership of a corporation’s shares is indirect, i.e. a mutual fund or a derivative product, the circumstances change.
Many investors use mutual funds as an investment vehicle. A great many people own mutual funds as part of their retirement savings that is managed by their employers, or by Financial Advisors. In such cases, the owners of mutual funds do enjoy the benefit of capital appreciation generated by growth in the individual stocks that make up the fund, but the owners do not have voting rights. The voting rights are exercised by the mutual fund management. The same situation arises for shares that are indirectly owned via a holding company.
In the case of owning a derivative financial product such as a futures or options contract in which the underlying asset is a stock, dividends and voting rights do not become a privilege until such time that the derivative is either exercised or called out resulting in direct ownership of the underlying shares. However, upcoming dividends are taken into account when pricing derivative contracts. This does not apply to derivative contracts of an index of stock (i.e. S&P 500 or DOW30). In this case, ownership of the underlying stocks that makeup an index is never realized.