A stock (also called equity) is a security held by a fraction of a company. This entitles the owner of the share to a share of the company`s assets and profits equal to the share he owns. Units of actions are called “shares”. This distinction is important because company ownership is legally distinct from shareholder ownership, which limits the liability of the company and the shareholder. If the business goes bankrupt, a judge can order the sale of all the assets – but your personal assets are not threatened. The court cannot even force you to sell your shares, even if the value of your shares has dropped drastically. Similarly, if a major shareholder goes bankrupt, they cannot sell the company`s assets to repay their creditors. Shareholders do not own companies; They own shares issued by companies. But companies are a special type of organization because the law treats them as legal entities. In other words, companies file taxes, can borrow, own property, be sued, etc. The idea that a company is a “person” means that the company has its own assets. A corporate office full of chairs and tables belongs to the company, not the shareholders. A stock represents a fraction of an organization`s equity.
It differs from a bond, which is more like a loan given by creditors to the company in exchange for regular payments. A company issues shares to raise capital from investors for new projects or to expand its business. There are two types of shares: common shares and preferred shares. Depending on the type of shares he holds, the shareholder has certain rights. An ordinary shareholder may vote at shareholders` meetings and receive dividends from the profits of the company, while the preferred shareholder may receive dividends and preferred shares from the ordinary shareholder during the bankruptcy proceedings. Companies issue (sell) shares to raise funds to operate their business. The holder of shares (a shareholder) buys a portion of the corporation and, depending on the type of shares held, may be entitled to a portion of its assets and profits. In other words, a shareholder now owns the issuing company. Ownership is determined by the number of shares a person owns in proportion to the number of shares outstanding. For example, if a corporation has 1,000 shares outstanding and a person owns 100, that person would own and be entitled to 10% of the corporation`s assets and profits.
It also describes the legitimate and fair price of shares when they are sold. This allows current shareholders to make decisions about potential future shareholders and preserve minority positions. This agreement should include the date, number of shares issued, restrictions on the transfer of shares (if any), the rights of current shareholders to purchase new shares, a ceiling table, an overview of shareholders and their percentage of ownership, and payment details in the event of a sale of the company. The number of issued shares is reported on a company`s balance sheet as share capital or equity, while outstanding shares (issued shares less all Treasury shares) are listed in the company`s quarterly filings with the Securities and Exchange Commission (SEC). The number of outstanding shares can also be found in the capital section of a company`s annual report. One of the most annoying problems for companies (and their boards of directors) is determining the fair market value of their common shares to calculate the strike price. In a public company, determining the fair market price of shares is made quite simple by looking at the closing price of the company`s shares on the relevant stock exchange or electronic market. For private companies, the task is not so simple. Stock options are generally granted for common shares. Shares acquired by a venture capital firm are preferred shares. Under the terms of the preferred share, it is primarily in liquidation and dividends are in liquidation and dividends are in common shares. Since preferred shares take precedence in terms of liquidation and dividends, common shares have less value than preferred shares.
In many cases, in the event of a liquidation or sale of a corporation, preferred stock preferences may consume all or substantially all of the proceeds, leaving very little consideration for common shares. Therefore, in many start-ups, the fair market price per common share should have a significant discount to the price per share of the preferred share. Employees want the board to set the highest possible discount, and it`s not unusual for start-ups to have stock options at a 90% discount to the preferred stock price. However, as the Company matures, the difference in value between preferred shares and common shares is expected to decrease, as sufficient proceeds should be attributable to common shares to heal holders while hopefully increasing value.