So What Really is a Share
Hello Fellow Bullhunters
Have you ever wondered what it really is to own a share. Is it just a piece of paper from your stock broker informing you that you purchased x amount of shares for x amount of dollars and that this piece of paper has your name (or trust name) at the top claiming you to be the proud owner.
Last time we discussed how the value of a stock is determined and today I am continuing with another excerpt from The Bull Hunters Guide to the US Stock Market. This eBook is available for free download here or enter your details on the form at the right of this page. We will be discussing what really is a share and what it means when you have ownership of that share.
Are Shares of Stock Really Just Pieces of Paper
This is a popular myth but a myth nonetheless. Shares of stock really do represent fractional ownership of a company. If you own a share of Wal-Mart you have a claim to its $2.56 of EPS. You and your fellow shareholders ultimately control the company. If the company goes bankrupt you have a residual claim on its assets - which means that it will have to sell all of its equipment and distribute the proceeds first to its debtors and then to you.
Better yet if the share price of a company sinks unreasonbly low another company can simply buy all the shares. If there were a company big enough to take over Wal-Mart it would have a literal (as opposed to theoretical) claim on all of its earnings - meaning money in the bank. If Wal-Mart’s share price fell from $50 to $25 but it still had $2.56 EPS then it is possible another company would attempt to buy it out. Of course in order to convince Wal-Marts current shareholders the takeover company would have to offer a premium to the current share price. The very fact that this could happen acts as a price support for Wal-Marts shares keeping them from falling too low.
Fractional Ownership of the Company
We can see from this excerpt that if you are the owner of any shares in any company on any stock market then you own a fraction of that company. I dare say that some of you may not have even thought about it that way before. It’s good to discover what it means and why as having this insight can help us choose the companys that we would like to trade with. Especially in the renting share strategy which does require you to own some shares in order to be able to rent them.
Until I see you again happy reading
Angela Recchia
Graduate Support
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