What is a Share?
A Share is a portion of ownership in a company.
In order to understand what a share is, we need to understand first what a company is.
A Company is a legal entity that allows its owners to conduct business under a separate legal identity, limiting their personal liability.
The original founders usually fund the newly created fictional identity with initial resources such as money and in exchange, a share of the control over the company and part of the assets in the new fictional identity are issued.
Thus, if five founders contributed $100 for the new company in equal parts; each one will get 20% of the total share of the new company.
Shares are usually “Issued” in financial terms. Therefore, if the company issued 10 shares of $10 value, each founder will get from the company 2 shares, $10 each.
Shares represent an owner’s right to the company’s profits. If our newly created company earned a million dollars and wanted to return one hundred thousand dollars to its owners, each owner would get 20% of the total profit – or $20,000 according to his share holdings.
If our company made 2 million dollars profit and was to be terminated by its shareholders, it would first pay back all liabilities it had (suppliers, loans to banks, employees), let’s say one million dollars.
The rest, its total net worth (also called equity or capital) of one million dollars, would be divided between its shareholders according to their shareholdings at that time. Each one would get $200,000.
Shares also provide the authority to make decisions concerning the company. So, for the company to decide to nominate a chief executive officer – fancy word for the top manager – a majority of the shareholders would need to approve of the decision before it could be done. In our case, a minimum of 3 shareholders representing 60% of the shares would have to approve for the proposal to be accepted.
Shareholders can trade in the company shares. They can sell them for cash or buy more of them; adding to their control and gaining a larger relative portion of future profits from the company the shares belong to.