EQUITY (SHARES): WHAT IT MEANS TO OWN A PIECE OF A COMPANY

To a beginner, the stock market can seem confusing with all its advanced jargon, news and endless data. However, at its heart, it is based on a simple, fascinating idea: when you buy a share, you own a part of a company.

- BY Umair Ismail, CFA

Shares, also known as equity or stock of a company, represent ownership in a company.

When you own a share, you own a small part of the company and may be entitled to a portion of its profits (called dividends) and have voting rights in certain company decisions. The more shares you have, the bigger the share of the profits.

Imagine the company as a massive pizza divided into 100 slices. Owning one slice means you hold a one percent stake, a small piece but still a part of the whole pizza.

For a listed company, issuing shares is one of the main avenues for raising capital to build its products and services, expand or fund its operations and invest in long-term projects.

What do you get as a shareholder?

When you buy a share of a publicly listed company, you become a shareholder, also called an equity holder. This means you have the right to earn returns and have a say in major company decisions, like choosing board members or approving big changes, proportional to the number of shares owned. Usually, one share equals one vote at the company's Annual General Meeting.

Returning to the pizza analogy, the more slices you're entitled to, the greater your influence on a company's decisions.

However, not all shares are created equal. The ordinary shares give you voting rights and a share of the profits, usually through dividends or capital gains. The preference shares, on the other hand, typically offer fixed dividends and priority over ordinary shareholders, if the company is closed down but often come with limited or no voting rights.

How does one go about owning a share?

You can purchase shares from a publicly listed company such as those listed on the Colombo Stock Exchange (CSE), in two main ways: