Understanding Stock Ownership: Debunking Common Misconceptions
While it’s commonly understood that owning stock means holding a share of ownership in a company, many new investors have misconceptions about what it truly means to be a shareholder. This confusion often stems from underestimating how much ownership a single share represents. For large corporations like Apple (AAPL) or Exxon Mobil (XOM), even owning $1 million worth of stock is just a fraction of total ownership, which means individual influence remains limited. However, understanding these realities empowers you as an investor.
Let’s explore three common misconceptions many shareholders have about their level of control and perks associated with stock ownership. It’s important to remember that these misconceptions are widespread among new investors, so you’re not alone in your learning journey.
Key Takeaways
- While stockholders own a part of the company, the level of ownership may not grant the benefits and control one might expect.
- Most shareholders need direct authority over a company’s operations. However, voting rights can offer some influence, such as electing members to the board of directors.
- Being a shareholder doesn’t mean you’re entitled to discounts or free access to company assets and property.
Misconception No. 1: I’m in Charge
First, it’s essential to realize that owning stock does not mean you can march into the company headquarters and start calling the shots. As a shareholder, you’ve entrusted the company’s management to handle operations and make decisions on your behalf. If you’re unhappy with how things are going, your primary recourse is to sell your shares. On the other hand, if you’re satisfied with the company’s direction, holding onto your stock could lead to future gains.
Additionally, when you’re worried about a stock’s price, remember that senior executives (insiders) often own as many—if not more—shares than the average shareholder. This insider ownership can influence the stock’s performance, as it incentivizes executives to maintain or increase the company’s stock value. However, be aware that insider ownership is a double-edged sword. In some cases, executives may use questionable practices to artificially inflate stock prices, only to sell off their shares for a profit quickly.
While you don’t directly run the company through stock ownership, if your shares come with voting rights, you can participate in voting for directors who oversee the company’s management. These directors hire the top executives, who in turn employ lower-level managers. So, as a common stockholder, you do have some indirect control over the company’s direction, even though it’s not hands-on management. This underscores the importance of your role as a shareholder in influencing company decisions.
In 2020, a Gallup poll revealed that 55% of Americans owned stocks.
Misconception No. 2: I’m Entitled to Discounts
Another common misconception is that owning shares entitles you to discounts on a company’s goods or services. There are exceptions, like Berkshire Hathaway (BRK/A), which offers shareholders discounts during its annual gathering. Other companies, such as Starbucks (SBUX) and Disney (DIS), offer perks like free coffee and park tickets to their shareholders. But generally, owning stock only allows you to participate in the company’s profits through dividends or stock price appreciation.
At first glance, it might seem appealing to get a discount, but upon closer inspection, you may realize you wouldn’t want one. Let’s look at an example with two companies: B’s Chicken Restaurant, which a small group privately owns, and C’s Brewing Company, owned by millions of shareholders.
Since B’s Chicken Restaurant is owned by a small group, offering a discount wouldn’t significantly impact overall revenue. The cost of that discount would be relatively small for the owners to bear. On the other hand, for a publicly traded company like C’s Brewing Company, the loss in revenue from widespread discounts would negatively affect the stock price. As stockholders depend on the company’s revenue to drive stock prices, offering a discount could lower the value of your investment. In this case, saving a little on purchases would come at the cost of your stock value dropping, making the discount less appealing.
Misconception No. 3: I Own the Physical Property
Owning stock in a company gives you a stake in the business, but this doesn’t mean you own the company’s physical assets, like desks, chairs, or equipment. Let’s return to the example of B’s Chicken Restaurant and C’s Brewing Company.
Many companies take out loans to finance their operations, including purchasing equipment, property, and inventory. If B’s Chicken Restaurant borrowed money from a bank, the property and equipment could be used as collateral. Larger companies like C’s Brewing have more complex financial arrangements, such as issuing bonds to raise funds from investors.
In both cases, creditors—like banks and bondholders—have the first claim on the company’s assets if it becomes insolvent. As a shareholder, you are last to receive any money if the company is liquidated. Creditors must be paid off first, and only what’s left over (if anything) is distributed among stockholders.
The Bottom Line
Hopefully, this clears up some common misconceptions about stock ownership. The next time you think about taking your stock certificate into a nearby McDonald’s (MCD) to demand a discount on a Happy Meal or attempt to fire an employee for not complying, remember that being a shareholder doesn’t grant you the power to seize company property or run operations.
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