Thursday, September 24, 2009

Common Stock For Beginners

       Want to know the bottom line on common stock? Well sit right back and I will try to explain. Common stock is at the heart of our securities market. They are the life blood of our corporate capitalist system. The word “common” stems from ownership in the company. If you own stock in a company, you share a “common” stock with others that own stock in the company.  Here is a example. Let’s say you have a wonderful idea for a new line of feet warmers that are going to revolutionize feet warming as we know it. The problem is you have no capital to fully invest in a company to get it rolling. So you get all your friends on the phone line and say “hey man, starting a new company, wants to be a investor?”  So you this time they believe in your Idea even though you burned them on that toilet seat warmer company. So now you got investors to put their money on the line. Thing is one friend, lets call him Bill, wants to invest $10,000 and one friend , let’s call him Ted, has a extra $5000 lying around the house he wants to chip in. The rest of your friends still remember the toilet seats so they are only going to throw in $500 for a total of 20 friends. Your combined capital now is $24,000, so you decide to break your company down into shares and make each share $500. Now Bill owns 20/48 shares or 12 percent of your company. Ted owns 10/48 or about 21 percent of your company. While the rest of your friends make up the rest of the 66 percent ownership. Now let’s say you want to make it open to people that might not be able to afford $500 dollars in your town, so you drop the price to $10 a share. That is common stock in a nut shell.
       Now what you have is a bunch of shareholders that have invested in your company. Hopefully you bought some of those stocks yourself or talked them into giving you a invested interest in the company. Now give your fellow shareholders a stock certificate to prove they own a piece of your company. Think of it as a deed on a house or a title of a car, except thousands of people can have the same piece of paper. Now you look at the numbers after the company is sold and let’s say there are 1000 people with money on the line with your stock. Now if you wanted to make a change in your company or sell it, you don’t want to have to go running to 1000 people for every single decision you have to make. Now your company becomes a type of democracy and you all elect a board of directors. The way that works is every share is counted as a vote. Now 5 share holders are going to be on the board of your company, so each share gets a vote on those 5 empty spots. Even the beginner investor with his $10 share gets one vote on 5 spots. Guess who’s most likely to get on that board in your company? You guessed is it, Bill and Ted. Excellent! In turn those 5 members will vote on a chairman responsible for managing your new feet warming company. The board of directors will also vote on other officers responsible to the company who may or may not own shares in the company. They will all have to answer to the board of directors.
       Annual meetings are held once a year and all share holders that have their money on the line with stock shares are welcome to come. If they can’t make it they can be mailed a report copy. Now if the beginner comes to the meeting and has to speak his mind about how he feels about the direction of the company is going, that’s fine, they will let him say his peace. The catch is if he wants to make some changes he can put out a motion, but guess what jack, majority rules and he will probably get voted down fast.  One guess who has the last say on what happens in the company. That’s right, guys with the most stock and money on the line, Bill and Ted.
       So what’s in all this trouble people are going through to own stock in your company? The bottom line is if the investors believe in the company and that company does well, then the stock they hold will increase in value. So if you end up selling that beginner stock you purchased for $10 and the market value is now $15 dollars, you just made $5 on that share. That’s a 50% return. Not bad for a beginner. Like I explained last post, putting your money on the line with stock can pay better than the bank, so it is well worth the risk.
       Another bonus of your money line on stock in the feet warming company is that your stock entitles you to dividends. A dividend is what’s paid back to the investing share holders of part of that company’s profits. But the stock holders don’t get all of the profits. The amount of money paid out to investors for their stock and the amount of money put back into the company is decided by the board. So if they take $5000 for dividends and $5000 back to the company, and all the investors stock equal 1000 shares, then each stock will pay 5$ each to the stock holder in your beginner company. Not bad. I will get more into common stock in my next post.

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