 Personal Finance Powerpoint Presentation. What owning stock means. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia. What owning a stock actually means, which you can find online. Take a look at the references. Resources continue your research from there. This is Brian Beers updated January 19th, 2022. In prior presentations, we've been looking at investment goals, investment strategies, investment tools keeping in mind and two main categories of investments. That being fixed incomes, typically bonds or the stocks that equity interests were focusing on the stocks at this time, asking what owning a stock actually means. People realize that owning a stock means buying a percentage of ownership in the company. So when you think about the owners of a company, remember the corporation is thought of as in essence a separate legal entity and the shareholders have a percentage ownership of the corporation in a similar fashion as you might think of basically a democracy or a republic where people basically vote for people to represent them in the government making decisions, acting as agents on their behalf. Similar kind of things on the stock side of things. If you're a small investor, you own some stock, you may have some voting capacity to be voting for things such as the board of directors, the board of directors there to act as the owner's agents in essence and then they hire the management, the CEOs, the CFO who then conduct the day-to-day business in hopes that they're all acting in conjunction and alignment with the owners of the companies, the shareholders. So, 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. So, when we think about the stocks themselves, it's been kind of an ingenious concept, the stock, the ownership having a corporation, a separate legal entity broken down into these individual units, these individual stocks so that then we can purchase these individual units and we can get an idea then of the value of those individual units of stock given the fact that they're all the same in nature and if they're trading on public exchanges, we can get a feel for what they're trading for at any given time, giving us a feel for what the value of our stocks might be at any given time. So, for large companies such as Apple, AP, AAPL, and ExxonMobil, XOM, one share is merely a drop in the pond. So clearly, if we're investing in large corporations on a public exchange and we buy, say, one share of stock of something like Apple, then we have a very small, we're like a voter in a republic, one vote, right? We don't, our vote's not gonna mean much in conjunction with the whole everyone's vote, but we still have that one vote. So even if you own $1 million worth of shares, you'd still be a small potato with very little equity in the company. So these very large companies, you can have a million dollars worth of stock in it and still you don't have a majority shareholder obviously if you were to vote, say, for the board of directors and you had over, say, 50% of the voting power, then you could do what you want at that point in time. But if you have a very little share, such as voting in a republic, if you're voting for a president or something like that, then obviously your one vote, even if you had a bunch of votes, would still be quite small with relation to the overall population of votes. So what does this mean? Let's take a look at three of the biggest misconceptions about being a shareholder. Misconception number one, I am the boss, it's okay. So first of all, you're better off not thinking that you can bring your share certificates into the corporate headquarters to boss people around and demand a corner office. So obviously you're the owner of the corporation in that you have a voting capacity in it, but unless your voting capacity is quite significant, then of course you don't have any direct control kind of like as a US citizen, we can't really go to the president and start telling them what to do, they clearly will not listen to us. So as the owner of the stock, you've placed your faith in the company's management and how it handles different situations. So as a small investor, what we're trying to do is say, hey, is this corporation running in a way that I basically agree with? If so, is investing in that stock gonna be beneficial due to the fact that I'll get generally revenue from the issuance of dividends, which again, I don't have direct control over as I would. If it was like my own small business, I could draw out money whenever I want the corporation, then it's gonna determine whether I get dividends and or if the stock value will go up in value. And if you don't like it, then you can walk with your feet, kind of like in a republic or in the United States going from one state to the other. If you don't like how one state is being managed or something like that. So if you are not happy with the management, you can always sell your stock. But if you are happy, you would 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 executive insiders probably own as many, if not more shares than you do. So clearly you're not gonna have the same kind of influence, but if you were thinking there's problems in the management, you would think people that hold a significant amount of the stocks might be thinking the same thing and hopefully be taking action on it. Although problems happen, group things happens just as funny things happen in like a republic when we're voting for people to represent us. And so on, you can see that sometimes the representation doesn't reflect even the will of, you would think that the average person because there's agency components involved and so on and so forth. So you gotta make your decision. Do you have any influence? Should you stay or should you go? So this isn't a guarantee that the company's stocks will do well, but it is a way for companies to give their executives an incentive to maintain or increase the stock's price. So in other words, the executives that are running the company, oftentimes in an attempt to have them invested in the company. So let's look at the structure here. Where the stockholders, where the owners, we vote for the board of directors and the board of directors often will be hiring, say management, CEO, C E F O's and so on. It's often a tactic to try to say, hey look, the people that are managing the company to have them have some skin in the game as they say. Some, meaning if they own a significant amount of the stocks, if it's significant to them, now they're not just acting as agents on behalf of the shareholders, but are actually benefiting directly with the increases in the stock price. Again, that direct increase is a little bit different because they're acting as management of the company and possibly owning the company, then say someone who just owns the company, just owns stocks, but you would think that to some degree, their interests would align. They would want the company to do well, in other words, would be the idea. Insider ownership is a double-edged sword though because executives may get involved in some funny business to artificially increase the stock price and then quickly sell out their personal holdings for a profit. So if you have someone that basically has insider information or has the capacity to influence the decisions of the corporation, then you're opening yourself up to them, making short-term gains as opposed to looking at the long run. Usually as an investor, we're hoping that they invest the money in such a way that they're gonna grow in the long run. But oftentimes, if you think about the goodwill in a company, meaning like the name, a brand of a company, you might ask yourself like, how is it that certain companies seem to be just putting out trash of products or services or so on and in the short run, they're gonna make money based on the name brand, but they're really giving up the long game because that once their brand is gone, once the goodwill is gone, they're gonna lose money. The executives in the short haul might be making out and then maybe they're not gonna be there anymore after the long haul hits and the goodwill is gone. So even though you can't directly manage the company with your stocks, vote for the directors who can if your stock has voting rights. So these are the people who typically hire upper management, which hires lower management, which hires subordinate employees, thus as an owner of a common stock, you do get a bit of say in controlling the shape and direction of the company, even though the say doesn't represent direct control. So even so you're voting for the board of directors. And so even if you have a significant influence on the board of directors, that's still not direct control over the day-to-day operations of the business because the board of directors, like representatives in a republic that you vote for are then the ones who are supposed to act as agents to hire management, like upper management CEO, CFO, who then hire the lower management, who then hire everybody else and so on and so forth. Those are the people actually managing the day-to-day. So misconception number two, I get a discount on goods and services. So if I buy stocks, I own this airline, I should get free travel on this plane or something like that. So another misconception is that ownership in a company translates into discounts. Now there are definitely some exceptions to the rule. So Berkshire Hathaway BRK slash 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 an ownership right of a stock is the ability to participate in the company's profitability. So you're not really gonna get, you're not gonna be able to fly on the airline if you own the airline stock typically unless you have a significant ownership or something funny or different or strange is going on. So why would it hurt for you to get a discount? You might say, why can't I get one then? Well, the answer is, the answer can get a little complicated. After some thought, you probably would not want that discount. 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 be borne by the owners, the millions of shareholders since revenue is the main driver of stock price and the loss from the 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 of the company's stock. Thus, discount isn't nearly as good as it initially sounds. So in other words, you might say, hey, look, if I own a small company or even if I work possibly for a company, I might get some discounts that would be involved. If I was an owner of a small company, it might make sense, because there's less owners. If you take a look at a publicly traded company, you're talking a huge amount of shares out there. So you could potentially have a whole lot of shares depending on how widely they are dispersed amongst people because more one individual can own multiple shares. If you give discounts to all of them, that would be quite costly to the corporation. You might say, well, why don't I just give discounts to some people? And that gets a little bit more difficult with shares because the whole point of shares is they represent an equal ownership in the corporation. So if you can't really say, well, this share here gives you more benefit than this share here, right? Because that would defeat the point of them being the same. You might be able to, you know, if you could say, well, if you own this many shares, maybe you should get a discount or something like that. But it's still that kind of distorts the meaning or component or what a share is supposed to basically do, which is to represent one standard unit of ownership. So misconception number three, I own the chair, the desk, the pens and the property, et cetera. So the actual assets of the corporation are actually mine. And investor, and notice again, the structure of a company would mean that the company itself is an individual entity. It's a corporation. It's gonna be paying its own tax. The government taxes the corporation. The corporation actually owns the stuff. But what you own is an equity interest, you know, in the corporation. So an investor is a company who own a portion of the company, no matter how small that portion is. However, this doesn't mean that you own property of the company. Let's go back to B's Chicken Restaurant and C's Brewing Company. So quite often companies will have loans to pay for property, equipment, inventors and other things needed for operations. So clearly in order to generate capital, in order to generate money, in order to invest, to generate revenue in the future, buying things like tables, chairs and restaurants and whatnot, they need loans. So let's assume B's Chicken Restaurant received a loan from a local bank under certain conditions whereby the equipment and property are used as collateral. Meaning, if you don't pay back the loan, they take all the stuff back to pay the loan. 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. So in either case, the owner must pay back the debtors before getting any money back. So for both companies, the debtors in the case of C's Brewing Company, this is the bank and the boardholders have the initial rights to the property, but they typically won't ask for the money back while the companies are profitable and show the capacity to repay the money. So in other words, the debtors, if you were to liquidate the company, would need to be paid first, right? And before the owners of the company because they have that first claim generally. However, if either of the companies become insolvent, meaning they can't pay their bills anymore, they're gonna go bankrupt, they're going out of business, the debtors are first in line for the company's assets. Only the money left over from the sale of the company, company assets is distributed to the stockholders. So what's the bottom line? Hopefully we've been able to dispel any misconceptions that some stockholders have about the powers of ownership. Next time you think about taking your stock certificate into the nearest McDonald's MCD to get a discount on a happy meal, attempt to fire the employee after refusing to give it to you and then finally walk out disgust with a McFlurry machine. You should remind yourself of the common misconception about ownership powers. So if you did that, if you went into McDonald's and said, I own a share of stock, you know, it's kind of like telling the police officer, I'm the one that pays your salary. It's not, it doesn't usually work out that well.