Also, shareholders do have same voting rights. You get one vote per share. If you want more votes then buy more shares. It’s only reasonable to expect those owning the most shares get the most votes. This is simple and rational.

The value of one share is a complex subject matter. You have to consider many things to conclude what value is. You must consider the price of the stock, the value of the assets, the debt, the intrinsic value of future earnings and cash flows, the goodwill value of things like the brand(like Coca Cola, Budweiser etc…where just the name alone is worth an awful lot of money), and then also consider the number of shares outstanding, and the dilution of those shares thru options, warrants, etc.

Shawn: Actually, book value does not normally (nor should it) reflect what the net assets could be sold for – it is often quite a bit less. A voluntary liquidation should yield more for equity holders (common shareholders) than the book value. Of course, a distressed or forced liquidation may not and in the case of wrongful accounting (e.g. Enron) then book value is misstated anyway.

At any rate, it all depends on what the assets are – some assets (like licences and rights) have less value if separated from the rest of the business.

Bubbles are sadly far more common than most Americans realise. Investors tend to play a game of “Follow the leader” and invest most of their money in certain types of stocks (or other assets in the case of the recent housing bubble). Initially this works since the surge in buyers for a given type of stock/asset pushes the prices up rapidly, but unless you get out of the market before the prices get too high and correct downward (i.e. crash) you are likely to lose a lot when the demand to buy fizzles out, and a lot of people are suddenly looking to sell at the same time.

This is why most good financial advisors tell you over and over to NOT try to “time the market”. It’s nearly impossible to tell exactly when irrational buying that fuels a price surge is going to switch to frantic selling and fuel a correction (polite term for a crash). A few lucky people manage to both get in and out early enough to make huge profits, but most get in late and then lose a lot when their $500 shares of Yahoo! drop to $50 six months later. Often they cling to these falling shares for too long because they “know” the price will go back up… After all, it had been doing so before, right?

“Selling short” is when someone makes a contract to sell shares (usually ones they do not yet own) at a fixed price to another person on a certain date. The seller is effectively betting the share prices will go down before then so they can buy the shares to cover the deal at below the amount agreed upon. They buyer is betting the opposite, that the stock will be worth more than the agreed price so they would be getting their shares at a discount. Both are in effect making a bet with each other, and the one who guesses right about the future trend (hence “stock futures”) makes money, while the one who guessed wrong usually loses money (there are some scenarios where both can make money on the deal, but they are rare).

When people talk about the “long” vs. the “short” interest in a stock, the “longs” are people that actually own a stock in anticipation of it rising in value, while “shorts” are the people who have sold “borrowed” shares in the belief the stock will drop before they have to cover the shares they borrowed.

Buying on margin means you are taking out a loan to buy a stock, on the assumption the stock will increase in value or pay enough of a dividend, to cover the loan’s principle and interest by the time you have to pay it back. It’s basically another form of betting (for the borrower). It was huge amounts of margin buying, with no requirements for a certain minimum ratio of asset values to debt, that led to the 1929 stock market crash and the eventual formation of the SEC (Securities and Exchange Commission). In the years leading up to the crash, investors bought large amounts of stock on margin, fueling a major stock bubble. When the stock prices started to drop the investors didn’t have the money to repay their debts causing them to have to sell off at any price to repay at least some of what they owed, thus fueling a huge crash in prices because there were few buyers with enough liquid assets (cash) to buy all of the stock that suddenly went up for sale! Today investors are required to have a minimum percentage of assets to cover most of their debt before they can buy on margin (I believe the law states you can have no more than 20% of your portfolio’s value in margin debt).

My initial comment did not address, as you did however, what book value means. Book value is an accounting term. While it “should” reflect what assets could be sold for, it rarely does. Liquidation value is the real money that would be distributed: First to bond and secured note holders, then Preferred stock, lastly, all others, to include common share holders. For clarification regarding the accounting “book value” and how that is not relevant here: What valuation were assets carried on Enron’s books prior to the liquidation? And, what actual value was obtained by the common shareholders through the process? It was pennies on the dollar, if anything.

- Warren Buffett

As for the problem with getting things done, corporations have three levels of supervision: shareholders, the board of directors, and the officers (CEO, president, and similar). While shareholders could theoretically make any decision, generally only the most important decisions are voted on directly, while the board makes policy and major operational decisions, and the officers actually handle the day-to-day running of the company.

Good overview. Just last week I had to make a very similar summary on this subject when an acquaintance asked me to explain how the stock market works, starting with the question, “what is a stock?”

It was good timing, because I had recently gone back to try and test my own basic understanding of this issue.

Shawn @ 11:17 is right to note that a common stockholder’s claim on company assets and earnings come after a bondholder’s or preferred shareholders claim on those same assets.

Here is an excerpt from another helpful link, explaining the common stock.

“First, what is a common stock? It can be said to. constitute the basic ownership of a company. It has no preference over any other stock, bond, or claim against the company, but after such preferred claims have been settled, then common represents the entire remaining interest in both assets and earnings.”

http://www.oldandsold.com/articles09/wallstreet-16.shtml

Trent there was one thing that I disagreed with you on. Unless you have specifically purchased non-voting stock, you do have a vote for every share, no matter how small your holding. And when you appoint a proxy you can tell them how to vote, rather than letting the proxy make the decisions. Other than that, this is a good post.

To me it’s unbelievable that any one person gets any attention in the process, or, is able to buy and sell at prices they think are “current”.

Excellent article. I love articles that explain things to adults that are not dumb about common things, but just haven’t been paying attention to them. This is the trend in web based eduction IMHO. :)

– Dave

Also, Exchange traded Funds may be something to look at.(ETFs)- You trade them just like stocks but they are collections of stocks, and a little safer.

Best,
Lisa

You made an important error here: “You also own a piece of whatever would be earned if the company decided to close up shop”

Common shareholders are the LAST group to be compensated when a company closes up shop for any reason. Bond and secured loan holders, then preferred shares, and lastly common holders. The first two groups usually get something. Typically, common holders get peanuts or bubkus! Just ask United Airlines employees that held stock in the last bankruptcy, and the ESOP before that. Is there yet another BR coming? Ask the Enron common holders how they made out.

Other than this error, it is a very good post. I hope that this shows some readers they can begin with little $$, save, learn, develop saving discipline, rinse, and repeat for 40 years and retire a millionaire.