A corporation exists as a separate legal entity from the shareholders, directors and officers that manage and own the business. Owning a company’s stock represents ownership or equity in a corporate entity. Ownership of corporate stock protects a shareholder from the debts, obligations and liabilities that may arise while running the business.
Shareholders of a corporation may own common or preferred stock. Common stock provides a shareholder with equity, ownership and voting privileges in a corporation. Common stock does not provide shareholders with certain privileges that can be gained through ownership of preferred stock. Shareholders that own preferred stock have no voting privileges, but they receive dividends before shareholders of common stock. If a corporation goes bankrupt, preferred shareholders receive compensation before common shareholders. Both types of stock can be bought and sold on Amex, NASDAQ and the New York Stock Exchange.
A company’s stock price is set by the corporation’s board of directors. Initial shareholders of a corporation have the ability to contribute cash, services and property in exchange for shares of the company. Ownership in a corporation is calculated by taking the number of shares owned and dividing that number by the total number of outstanding shares, as explained by the Mysmp website. For example, if a person owns 50 shares of a company that has 200 outstanding shares, he owns 25 percent of the corporation.
Stock Price and Dividends
Investors purchase stock in hopes of earning a significant return on their investment. For instance, an investor that purchases stock at $5 per share and sells at $50 per share has made a significant return on his investment. Shareholders of a corporation can make money on their investment when the company issues dividends. The corporation’s board of directors makes the decision regarding how much to issue in dividends to shareholders. A corporation may or may not issue dividends, depending on the financial health and stability of the business. If the company does not issue dividends, shareholders have to hope the stock price increases in order to earn a return on their investment.
Investing in a corporation’s stock does not come without risk. A corporation’s price per share may decline due to poor management or a decline in revenues, as explained by the New York Office of the Attorney General website. This means shareholders will lose money on their investment. If a corporation goes out of business, shareholders may lose all the money invested in the company. Also, a corporation’s price per share may take a significant decline, if shareholders decide to sell a large amount of stock at the same time. This type of event causes the company’s remaining shareholders to lose money on their investment.