If a company has 1,000,000 shares outstanding and you hold 10,000, you own 1% of the company. This does not mean you can take 1% of its buildings or equipment, but that you have proportional rights to its results and decisions, within the limits set by law and by the company's articles of association.
An important feature is limited liability: as a shareholder, your risk is limited to the amount you invested. If the company runs into trouble, you can lose the value of your shares, but you are not liable with your personal assets for the company's debts.
For the company, issuing shares is a way to raise capital without taking on debt: the money received from shareholders does not have to be repaid on a set date. In exchange, the company shares ownership and, by extension, future profits with the new shareholders.
Shareholder rights
Owning shares gives you a set of rights. The exact content depends on the type of shares and the company's articles of association, but in general, for ordinary shares, they include:
The right to vote at the general meeting of shareholders, for example on electing the management bodies or approving the distribution of profit.
The right to dividends, when the general meeting decides to distribute part of the profit.
The right to information about the company's activity and financial position.
The right to receive a share of the remaining assets in the event of liquidation, after all creditors have been paid.
Feature
Ordinary shares
Preferred shares
Voting rights
Yes, as a rule
Usually limited or none
Dividends
Variable, depend on the shareholders' decision
Usually have priority in payment, often in a preset amount
On liquidation
Paid after creditors and after preferred shares
Paid before ordinary shares
How you earn from shares
The return on an investment in shares can come from two sources: dividends and capital gains.
A dividend is the part of the profit distributed to shareholders. It is not guaranteed: the company may decide to reinvest the profit in growth, or it may make no profit at all. A capital gain arises when you sell shares at a higher price than you paid for them. If the price falls, you record a capital loss.
This simplified formula does not include commissions and taxes, which reduce the actual return.
What influences share prices
In the short term, a share's price reflects the balance between supply and demand on the exchange. In the long term, it tends to be influenced by the company's performance and by investors' expectations about future profits. Factors that can matter include:
The company's financial results and growth prospects.
The general economic situation, inflation and interest rates.
Developments in the sector in which the company operates.
The share's liquidity, that is, how easily it can be bought or sold.
New information published by the issuer and overall investor sentiment.
Key takeaways
A share represents a portion of a company's capital, and the shareholder becomes a co-owner.
Ordinary shares usually carry voting rights and the right to dividends; preferred shares have priority for dividends but usually limited voting rights.
Earnings from shares come from dividends and capital gains, but neither is guaranteed.
A shareholder's liability is limited to the amount invested.
Share prices depend on supply and demand, the company's results and the economic context.
Check your knowledge
Answer all the questions. If you answer all of them correctly, the lesson is marked as completed automatically.
Explanation: Investment: MDL 1,000. Sale: MDL 1,100 (capital gain of MDL 100) plus dividends of MDL 50. Return: 150 ÷ 1,000 × 100 = 15%.
Explanation: The shareholder is not liable with personal assets for the company's debts; the maximum loss is the amount invested.
Explanation: Dividends are distributed from profit, based on the decision of the general meeting of shareholders, and are not guaranteed.
Finished the lesson?Mark it as completed to track your progress.
Educational material only. It does not constitute investment, legal or tax advice. Numerical examples are hypothetical.
