Eli5 what’s the difference between buying the stocks of a business and buying the business directly?


Eli5 what’s the difference between buying the stocks of a business and buying the business directly?

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>Eli5 what’s the difference between buying the stocks of a business and buying the business directly?

I’m not sure what you mean by “buying the business directly”, could you elaborate on that?

Buying 1 stock of a traded business that has issued a total of 1000 stocks **literally** means buying 1/1000th of the business.

A corporation’s ownership is broken up into stocks. Quantities vary. Each stock is worth 1 vote at a shareholder meeting on whatever comes up.

Stocks also often are things you can trade based on expectations of values going up/down, and some corporations will distribute their excess cash in the bank to shareholders also bestowing the shares some value. So people do own stocks without planning on participating in the meeting and votes, just because they treat them as an investment thing instead.

If you want to “buy” a corporation, you need a controlling majority of the shares. That is, 50% + 1 share, ensuring your vote just automatically wins. Now you can just “vote” out the current board of directors, replace them with your own nominations (presumably yourself will be one of them) and do what you want.

Of course this only applies to corporations, and they’re like this because they’re considered separate entities from those people who originally created it. Smaller bussinesses are usually owned by one or a few people, and you can just convince them to let you have it in exchange for a bunch of money. If they’ll sell, of course.

It’s important to clear up some terminology.

A *corporation* is an artificial person. Not all corporations are businesses and not all businesses are corporations. Some corporations are things like the City of Toronto or Queen’s University. Some businesses are sole proprietorships or partnerships. Because corporations are artificial persons they need to hire someone to be their brains. These people are called *directors* and the directors make decisions for the corporation.

A *share* (or *stock*) is a thing that gives you some right in a corporation. Usually, if you own – say – 1% of the shares in a corporation you will get 1% of its assets if it’s dissolved and get 1% of the vote when it comes time to vote for directors. But that’s not necessarily the case, there are some shares that can’t vote or get more votes – and some shares that are entitled to *dividends* (payments from the corporation).

*Public corporations* are corporations whose shares are bought and sold on a *stock market*. *Private corporations* are corporations where this isn’t the case. Public corporations are more regulated.

With that out of the way, let’s look at your question. Say you’re very rich and you want to buy a business. What do you do? If it’s a private corporation there are probably only a few people who own all of the shares. So your people talk to their people and a lot of accountants and lawyers will look at the deal and decide where to do a share sale or an asset sale. If it’s a share sale, then the people who own all of the shares sell those shares to you, and then you can use those shares to appoint yourself (or anyone you want) as director. If it’s an asset sale then the corporation sells you all of the things that the corporation owns.

If it’s a public corporation things get a little more complicated. First, because the shares are sold on the stock market there are going to be potentially thousands of people who own the shares of the corporation, so you’re not going to be able to talk to all of them and get them to sell you their shares.

So you have two general options. You go to the directors and you say you want to do something called, in my jurisdiction, a Plan of Arrangement. Basically, you propose to buy all of the shares of the corporation for a certain price and then the shareholders vote on the deal. If the vote goes in your favour you get all of the shares of the corporation even people who vote no (the way this generally works is that the old shares are cancelled and new shares are issued to you). You will generally need to get a court order for this sort of deal.

The other way is a *proxy war*. You just start buying up shares of the corporation and then try to vote out the directors and replace them with yourself and your slate of directors. Generally, you’re not going to be able to buy 50%+1 of the shares – so this is like a political campaign where you try to get other shareholders to vote out the current directors.

Nothing, other than you need to buy the majority of stock to be able to control the business directly. One stock gets you probably one vote, but the majority of stocks would mean you get the majority of votes, so anything that is voted on would go your way.