Understanding Stocks and Share (Corporate Governance ESL)

11 Sep

**This is very simplified for the sake of ESL learners who are new to Corporate Governance.

Let’s pretend you want to start a corporation – you have a name and products.  But you need money.  You don’t have any money, your partner’s don’t have any money.  What do you do? The only thing you can sell for money is the company itself.  

So that’s what you do.  You decide that you will sell stocks.  What is a stock? – it is the right to claim the profit’s the company earns and the right to decide what the company does.  Now let’s say you divide the stock into 1000 shares – what is a share? – it is a small piece of paper saying you own 1/1000th of the stock – you get 1/1000th of the profits and you get 1 vote of a 1000 possible votes deciding what the company does.  In return for owning your share of the stock, you give the company money so that it can develop and grow.  To prove that you own the shares, when the corporation begins, it gives the owners, or shareholders as they are called, stock certificates – the papers we were filling out in class (basically fa piao or official receipts)

One person can buy more than one share – the board will decide a certain price for each share (i.e. $1 per share) and you can own as many shares as you pay for.  So let’s say I decide to pay $500 = I get 500/1000 shares = my vote will be counted 500 times and I will get 50% of the profits.  In most family-run corporations, family members will own 50-90% of the shares so that they control the majority of the votes and make most of the profit. If they own less than 50% of the shares, the other owners can out-vote them and make decisions for the company that the family doesn’t want.  This is a problem, so families are very careful to avoid that risk.  

The board has to think about this when starting the corporation because they will have to be careful about who holds power over the profits and votes.  Remember the agency relationship – the shareholders or stock-owners are the principals, the board is the agent – the shareholders can always vote to remove or change the board, but the board cannot replace owners they don’t like. Basically, the original board of directors chooses their owners by selling them shares, but once they do that all power goes to the new owner.   

**Note that the number doesn’t have to be 1000, the bigger the company the more shares will be available for purchase.

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