What it Means to be an Investor
Overview
In this module, we are going to debunk the myths around owning shares and clarify what being an investor entitles you to.
Most people realize that owning a share means that you are buying a percentage of ownership in the company, but many new investors have mistaken beliefs about the benefits and responsibilities of being a shareholder.
Many of these mistaken beliefs come from a lack of understanding of the amount of ownership that each share represents. We aim to help you gain a better understanding of this with this module.
Rights of an Investor
Holding a company's share means that you are one of the many shareholders of a company, and, as such, should the company choose to pay out dividends you will receive the set dividend based on the amount of shares you own.
As an owner, you are entitled to vote at annual meetings. However, it does not mean that you are the boss at the company in which you are invested. As a shareholder of a public company, you do not necessarily have a say in the day to-day running of the business.
For instance, as a shareholder in Microsoft, you cannot necessarily call up Bill Gates and give him your opinion of how you believe the company should be run.
The management at a company is meant to increase the value of the firm for shareholders. Should this not take place, the shareholders can vote for the management to be removed.
Profits are occasionally distributed in the form of dividends. As your share ownership increases, so does the portion of the profits you get.
In terms of your claim on assets in the company, this is only relevant if a company goes bankrupt. In case of bankruptcy, the shareholders will receive what's left after all the creditors have been paid should there be anything left to pay out at all.
Limited Liability
An extremely important feature of shares is their limited liability, which means that, as an owner of a share, you are not personally responsible if the company is not able to pay its debts.
In some instances, certain businesses such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) in their personal capacity and sell off their furniture, house, car etc.
Owning shares means that, no matter what, the maximum value you can lose is the value of your investment i.e. the funds (including any growth) you invest in the company. Even if a company where you hold shares goes bankrupt, you can never lose your personal assets.