See the angry mob? Yeah, they’re yelling and screaming at me. They hate and despise me. I’m the bad guy that’s the cause of all their problems. With the recent Toronto Star article (Tax Breaks Don’t Create Jobs) it’s only adding fuel to the fire. No, I’m not a CEO. I’m not in top 1% income bracket. Heck, I don’t even have a six figure salary, but I live with the mantra “If you can’t beat them. Join them”. So what have I done to earn such hatred? I’m their cell phone provider. I’m their gas provider. I’m their pharmacy. I’m their bank. I might even be their landlord. How did I do that? I own shares.
Stocks. It’s that evil word. The destroyer of wealth. The smell of capitalist greed. Stocks.
I wrote about bonds and how owning a bond is like being a debtor to a company. On the other side of the balance sheet are common stocks. Owning a common stock in a company signifies that you are a part owner of the company. One of the perks of being an owner of the company is that you get to share in the success of the company. If a company does well, the value of the company rises and the value of your shares will rise with it. If profits increase, the company may decide to share that profit through the distribution of dividends. Dividends are a way of saying “Thank you.” to the shareholder of the company in the form of a cash payment.
As a shareholder of a company, you will want the company to continually produce larger profits. Larger profits means more money in your pocket. More profits also mean the greater likelihood that the company will grow larger, thereby increasing the value of the company and also increasing the value of the shares you hold. You want management to be looking out for the interests of the shareholders because you are a shareholder. When things don’t go your way, there are means to make management take notice. Most companies will provide voting rights to make your voice heard, just like a democracy. Each share that you own is considered one vote. Common shareholders will generally get to vote on who makes up the board of directors, who the auditors will be and also who gets those very important positions like CEO.
The number of shares that are available for a particular company are limited. This number is decided by the company that issues the shares. The more shares that are available, the more diluted your ownership is of the company. A company issues shares because they want to raise money in order to run the day-to-day operations and to provide additional capital to expand operations. In return, the company tries to create value from your money, and rewards your patience by giving you back a portion of the profits. The more shares you own of a company, the greater your reward will be if the company performs well.
Not all stocks are created equal and price also doesn’t dictate just how valuable a company really is. Just because the price of share in a company is $500 does not make that company more valuable than a stock where the price is $2 a share. The number of shares outstanding for the company is very important, as it represents the number of shares that are available and traded in the open market. Take for instance two very popular companies: Google and Apple.
- Apple shares are worth $457.84 with 939 million shares outstanding
- Google shares are worth $765.74 with 329.6 million shares outstanding
* Values are approximate at the closing date of February 5, 2013
If you were to look at price alone, you would think Google would be worth more, but this is not the case. Apple is worth almost $180 billion more than Google because the number of shares that Apple has is much greater. (Simply multiply the two numbers to get each companies market capitalization). The number of shares issued by a company is quite arbitrary. There could be many reasons why a company issues a certain number of shares. Warren Buffet’s company, Berkshire Hathaway, has never split its shares. The price of each stock is an astonishing $146,958 per share. One of the reasons for this is that the company doesn’t want speculators to buy their shares. At such a high price, only the most serious of investors would consider buying a share of Berkshire Hathaway at that price.
Owning stocks in one’s portfolio is quite important because corporations form the foundation of every developed country’s financial engine. Alas, many individuals shy away from stocks? Why is that? Because money becomes emotional. Stocks have a monetary number attached to them, which give them a tangible value. For those who treat money in a very emotional way, they may feel uncomfortable seeing the value of their shares gyrate up and down every day. This can lead to very irrational decisions, depression and anxiety. Stocks can also be much riskier than bonds because there is no floor to the value of a share. If a company goes bankrupt, unlike a debtor to the company, the owner is not guaranteed to get back their money. This means that if you are a shareholder of a company that goes bankrupt, you most likely won’t be able to get your money back. Many see these risks as being too great. The fear of losing all their money tends to outweigh the fact that the stock market is one of the best ways to make your money grow.
Despite these risks, one shouldn’t be shying away from stocks. These risks just need to be managed and mitigated by being smart with your investments and taking the time to do proper research before making an investment. Luckily you are reading my blog and I will help you to discover the many techniques that will help you in your decision making.
So don’t be angry. Tell your friends to read the blog. Don’t be the 99%. Be the 1%. If they don’t learn, well, next time they complain that the bank charged them a $5 overdraft fee on their credit card, don’t get mad with them. Be happy. They are lining your pockets. Just don’t tell your friends that.