While the basics of a share of stock are simple, it gets more confusing when you get into things like common and preferred stock, or issued and authorized. Lots of equally confusing terms are applied to stock shares, such as par value, capitalization and dividends. Recognizing the nature of stock helps you understand what a share really is.
Why Companies Issue Shares
Companies sell stock in order to raise money to run the company. They are willing to trade some of their ownership in exchange for capital. This is called capitalization. This money is particularly important if the company wants to invest in itself so it can grow.
What Owning a Share Means
When you purchase a share of stock, you are purchasing partial ownership of the company that issues the stock. That ownership entitles you to the rights of an owner, such as voting on how the company will be run and receiving a portion of the company's profits (dividends).
All Shares Are Not Equal
Not all shares are alike nor do they cost the same. Stock can be issued in different classifications, each with its own cost. Preferred stock essentially puts the shareholder at the front of the line when dividends are paid out. Common stock shareholders are paid after the preferred shareholders are paid.
How the Number of Shares Is Determined
When a company goes public, it has made a decision to offer stock to the public. This is when the number of shares the company will issue is determined and noted in the articles of incorporation. A corporation needs at least one shareholder who owns at least one share of stock. Each share of stock will list the stock's par or the minimum amount that can be paid for the share. Shares can also be no par or have no minimum cost.
Companies can't simply sell as many shares as they want whenever they want because it would dilute the ownership of the existing shareholders. If the company wants to issue more stock, the shareholders must authorize it. Thus, authorized shared are the total number of shares a company can sell. The number of shares that have been sold are the number of issued shares. The difference represents the number of shares the company is holding back, most likely for future capital needs.
As the company goes about its business, its goal is to make a profit. A dividend is a payment to shareholders of their portion of the profit. Not all of the profits are paid out in dividends. Some money may be held back for reinvestment. Dividends act like interest paid on a savings account except that dividends don't have to be paid regularly.
Selling Stock Shares
The market price of a share of stock is more of a gauge of what investors think of the company than what the company is actually worth. The difference between the buy price and the sell price is called a capital gain if you sell for more than you bought it for. If you lost money, then you will have a capital loss.