what is buying a fraction of a share from a company means and how does that generates me money
In: 4
Buying a share is buying a very small part of a company.
As a simplified version, a company could choose to sell a certain amount of their ownership, so they will split the company into a certain amount of shares.
If a company chooses to do this and creates 100 shares for example, buying one of those means you now own 10% of that company.
What this means is that you now have a share in the profits and losses of that company – if they do very well your shares become worth more and you can sell them on to someone else for a profit, but equally is the company does poorly they may lose value.
It also means you may also earn sooner of the profit a company makes – some of their profits will be periodically returned to investors in the form of a dividend, which is a cash payment to investors based on how many shares they own.
An additional benefit is control over the actual running of a company – if you own a significant percentage of that company, that gives you a certain amount of control over the operations of that company. Often this control will be delegated to a board of directors, but it can be important in stone big decisions, and is one reason why you will often see the original owners of a company retaining at least 51% of the available shares – it means that if an issue needs to be voted on, they still control a majority of the votes.
Of course in reality very few people will be buying significant percentages of a companies shares – tend of thousands of dollars worth of shares will be a tiny, tiny percentage of the overall company and so your control will be very limited, however things like profit sharing through dividends are still a feature, and while you won’t have direct control over the company decision making, companies will hold annual general meetings where all of the interested parties can meet up to report on the condition of the company, give operational updates and vote on relevant decisions.
The main ways of profiting through shares for someone who doesn’t care about the actual running of a company mainly come down to earning periodic dividend payments through the shares they own, and the ability to sell a share at a profit when is company grows
Latest Answers