What are Shares?
Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Physical paper stock certificates have been replaced with electronic recording of stock shares, just as mutual fund shares are recorded electronically.
BREAKING DOWN Shares
When establishing a corporation, owners may choose to issue common stock or preferred stock.
Most companies issue common stock. The stock may benefit shareholders through appreciation and dividends, making common stock riskier than preferred stock. Common stock also comes with voting rights, giving shareholders more control over the business. In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.
In contrast, preferred stock typically does not offer appreciation in value or voting rights in the corporation. However, the stock typically has set payment criteria; a dividend that is paid out regularly, making the stock less risky than common stock. Also, preferred stock may often be redeemed at a more beneficial price than common stock. Because preferred stock takes priority over common stock, if the business files for bankruptcy and pays its lenders, preferred shareholders receive payment before common shareholders.
Authorized and Issued Shares
Authorized shares comprise the number of shares a company’s board of directors may issue. Issued shares comprise the number of shares that are given to shareholders and counted for purposes of ownership.
Because shareholders’ ownership is affected by the number of authorized shares, shareholders may limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they conduct a meeting to discuss the issue and establish an agreement. When shareholders agree to increase the number of authorized shares, a formal request is made to the state through filing articles of amendment.
Example of Shares
As the 10-year bull market that began in 2008 stretched on, shares of companies continually reached new highs through 2017. So-called FANG (Facebook, Apple, Netflix and Google) tech stocks led the market rally, as their share prices soared by double digits in 2017 on strong earnings results. The increasing price meant that investors were willing to pay more to own shares of these companies. All told, the shares of the companies in the S&P 500 Technology Select Sector traded up 34.57% in 2017. In 2018, the shares of companies on the stock market began to experience volatility due to economic and political uncertainty.