Shares

Shares (also known as stock or equity) represent a slice of ownership in a public company. Think of a company as a giant pizza. Each share is one slice of that pizza. When you buy a share, you're not just buying a piece of paper or a digital blip; you're becoming a part-owner, a shareholder, of a real business. This ownership stake gives you a claim on the company's future earnings and a portion of its assets. If the business thrives and becomes more profitable, the value of your slice can grow. If it struggles, the value can fall. Companies sell these slices to the public on the stock market primarily to raise money—or capital—to fund their growth, launch new products, or pay off debt. For an investor, buying shares is the most direct way to participate in the success of the world's most innovative and enduring companies.

Imagine you own a successful local bakery and want to expand into the next town. You need money for a new oven and a bigger shop, but you don't want to take out a massive loan. What can you do? You can sell a piece of your bakery to friends and family. This is exactly what large corporations do, but on a massive scale. By issuing shares, a company raises money without going into debt. Unlike a bond, which is essentially a loan that must be repaid with interest, selling shares means the company gets to keep the cash. The “price” the company pays is giving up a fraction of its ownership and future profits to its new shareholders. It's a fundamental trade-off: cash today for a smaller piece of a potentially much larger pie tomorrow.

Just like ice cream, shares come in different flavors. The two most common types are, fittingly, common and preferred. While you'll most often encounter common shares, it's good to know the difference.

This is the vanilla ice cream of the stock world—the most widespread and straightforward type. When people talk about “buying stocks,” they are almost always talking about common shares.

• Ownership and Control: Holders of common shares are the true owners of the company. They have voting rights, which allow them to vote on important corporate decisions, such as electing the board of directors or approving a merger.
• Unlimited Upside: The value of common shares can, in theory, grow infinitely as the company succeeds.
• Variable Payouts: Shareholders may receive payments called dividends, but these are not guaranteed. The company's board decides if and when to pay them.
• Highest Risk: If a company goes bankrupt and undergoes liquidation, common shareholders are last in line to get their money back, after bondholders and preferred shareholders have been paid.

Think of preferred shares as a hybrid—part stock, part bond. They offer a unique set of features that appeal to more conservative, income-focused investors.

• No Control: Preferred shareholders typically have no voting rights. They are owners, but silent partners.
• Fixed Dividends: They usually receive a fixed dividend payment at regular intervals. The company must pay these dividends to preferred shareholders before any dividends can be paid to common shareholders.
• Priority Payout: In a liquidation, preferred shareholders get paid back before common shareholders.
• Limited Upside: Because of their lower risk and fixed dividend, the price of preferred shares doesn't usually appreciate as dramatically as common shares.

For a value investor, a share is not a lottery ticket. It is a tangible stake in a business. This philosophy, championed by legends like Benjamin Graham and Warren Buffett, completely changes how you approach the stock market.

A value investor thinks like a business owner, not a speculator. You don't buy a share because you hope it goes up next week; you buy it because you've studied the underlying company and believe it has excellent long-term prospects. You are becoming a partner in that business. This mindset encourages patience and discipline. If the price of a great company's stock drops, you don't panic. Instead, you might see it as an opportunity to buy more of a wonderful business at a cheaper price. As Buffett says, “Our favorite holding period is forever.”

The daily fluctuations of the stock market are just noise. What truly matters is the company's intrinsic value—what it is fundamentally worth based on its assets, earnings power, and future prospects. The value investor's job is to calculate this value and then compare it to the current market price (the price on the stock market). The goal is to buy shares only when the market price is significantly below the calculated intrinsic value. This discount is called the margin of safety. It's the bedrock of value investing—the principle of buying a dollar's worth of business for 50 cents.

Understanding what a share truly represents—a piece of a living, breathing business—is the first step toward becoming a successful investor. It shifts your focus from chasing short-term market fads to identifying high-quality companies you'd be proud to own for the long haul. Forget the frantic trading and hot tips. By thinking like an owner, you can harness the power of capitalism to build wealth patiently and intelligently.