Please forgive me for the utter ignorance displayed in these questions, but I know precious little about how the stock market works.
Buying stock. When I buy the stock, how does the company know I own some? Do I get a piece of paper for each share? Is my name & address recorded somewhere at the company?
Dividends. How exactly are dividends paid out? Does the company just send me a check? If so, how often? Even if the dividend is only a few cents, and the company would spend more in postage sending out to me?
Value of Shares. If traders buy shares from each other, then what difference does it make to the company if the shares are trading at $1 or $100?
How is the money apportioned to shareholders in the first place? If Homie’s Widgets earns $1B this year, and there are 1,000,000 shareholders, does each shareholder get $1,000? What about the company’s cut?
Generally you’ll buy the stock through a brokerage service such as Fidelity or Vanguard. You can (or at least used to be able to) request that the company issue you a certificate in which case the brokerage has no further dealings with it; alternately you can leave the stock to be held by the brokerage. That’s called book entry. I believe the company has to know of all the stockholders one way or the other, as this is how the holders can vote in the various elections.
If the stock is held by a brokerage, we’ve found that the dividends are used by the brokerage to reinvest in new shares. Alternately you can tell them you want the dividends credited to your account as cash. If the stock is held by the company (either you hold certificates, or have purchased stock directly from them), then either you get a check (I used to get checks for 1.40 a quarter) or you can tell them you want the proceeds to be used to invest in new shares (for that same 1.40 a quarter stock, I’ve been reinvesting for over a decade now and I get a new share every year or so).
I assume the company owns some shares as well. Also, if the stock is trading at 1.00 a share vs. 100 a share, it’s a sign that people think the company isn’t doing well profit-wise. So the company cares only in that it’s a sign of other problems. (my opinion here).
Companies declare dividends each quarter (or whatever). They certainly don’t pay out all profits. It’s usually a certain amount per share - e.g. 50 cents per share or some such. Some companies don’t pay put dividends at all, ever (Microsoft?). Others stop dividends if they aren’t doing well financially.
Typically, you would buy stock through a brokerage firm. You deposit money into your brokerage account, and then your brokerage buys, sells, and holds the stock on your behalf and according to your wishes. The company records the name of your brokerage on its books as the holder of the stock, and your brokerage keeps records of which account(s) hold the company shares. It is also possible to own the shares directly in which case, yes, your personal information would be kept on file at the company as a holder of record (an ownership transfer form is submitted when you trade shares).
Nowadays, most stock transfers are handled electronically. You can usually obtain paper stock certificates for an additional charge.
If you own the stock through a brokerage account, the money gets deposited into your brokerage account. If you are listed directly as a holder of record, then the company sends you a check or transfers the money electronically into your bank account.
Stock shares are ownership stakes in the company. Shareholders have a say in how the company is run by electing board members who oversee company management and some aspects of corporate policy. Since the board members are elected by shareholders and receive compensation for sitting on the board, they are, in theory, supposed to represent the shareholders’ interests. Shareholders also vote on various policy proposals directly.
How company profits are apportioned is up to the board. Some portion of corporate profits are retained by the company for reinvestment and growth. The rest is distributed to shareholders as dividends. Dividends are declared by the board.
In immediate financial terms, it makes no difference whatsoever.
However, company management is hired by the shareholders. When the share price declines from $100 to $1, shareholders tend to fire the managers, which gives the managers reason to care about the share price.
In addition, many companies either grant their employees stock outright, or encourage the employees to buy shares, so that the employees will have a direct stake in the share price as well.
Finally, a healthy share price makes it easier for the company to raise additional capital by selling new equity at some future time. Of course existing shareholders must approve any such sale since it will dilute their ownership.
This is called holding “in street name”, and it is the way most shares are held in brokerage accounts. You may notice that communications from the company, such as annual reports or voting proxies, are mailed to you in a wrapper from your brokerage, rather than from the company’s agent.
Holding a certificate is just that much extra work when you want to sell the shares.
If you trade electronically, your brokerage’s online forms will probably include a checkbox for you to indicate whether you want dividends reinvested or paid in cash. When I use Schwab, it defaults to “cash”. The option isn’t always available. Some companies may choose to pay dividends only in new shares, or not offer a reinvestment plan, for instance. With the current situation, some high yielding investments are choosing to pay at least part of their dividend in new shares rather than cutting their dividend. Two securities which have always preferred that you take your payout in new shares, for instance: CX and HQL (Cemex, the Mexican cement giant, and a biotech closed end fund). They may even attempt to make that attractive by valuing the new shares at a discount from market price.
Dividends are determined by the board. It’s very important that they pick the right number. Too high and the company doles out too much money. Too low and demand for the stock goes down. Companies that expand (like, say, broadband) can keep their dividends lower and reinvest it. Companies that are too big to expand any further (Procter & Gamble) like to pay out big dividends. If the stock pays 1$ a year and it only costs, 5$ to buy, then that’s an extremely high yield (20%). Some investing strategies (called income investing or dividend investing) are based on this number.
Because at least 50.1% of the stocks are owned by the person we normally call the “owner”. That’d be Ray Crock, Bill Gates, Warren Buffet, etc. The higher-ups (CEOs and other board members) most likely own a great deal of it too. Occasionally, they want to buy a new yacht or trampoline room and sell some stock to raise the money. Wouldn’t it matter to you if the value of your house suddenly plummetted or skyrocketed?
Homie’s Widgets would decide “Ok, we made a billion…let’s give out a million in dividends.” and that gets divided equally amongst the stocks (not the stock holders…if I own twice as much, I get twice as much).
If you spend some time on finance.yahoo.com, you can check out all sorts of numbers, including what the projected numbers are for the next quarter or year. Have fun.
One should note that if you are automatically reinvesting a dividend (as opposed to receiving a share dividend), it complicates your basis for the shares you are holding. The shares from reinvestment have different times, and different bases. One reason I prefer to not reinvest dividends.
Most mature companies are nowhere near owned 50% by insiders anymore. Many IPOs aren’t (a big chunk is owned by the venture capitalists who funded the enterprise, and who are likely going to exit when they reasonably can). MSFT, for instance, is only held 13.17% by insiders, and 60.9% by institutions (yahoo.com key statistics). Bill Gates holds 753 million of the 8.9 billion shares. For really mature blue chips, the numbers are typically even smaller - JNJ has a piddling 0.03% insider ownership (65% held by institutions).
Nitpick: there are companies like the New York Times or Ford Motor where the founding family doesn’t own a majority of the shares but through ownership of special shares does control the company.
The dividends paid to the shareholders is the company’s cut. Ultimately, anything the company owns is owned by the company’s owners, and the shareholders collectively are the owners of the company.
This does not necessarily mean that all money coming into the company turns into dividends. Some portion of it is generally going to be used to expand the business: Building new factories, or developing new product lines, or whatever. But activities like that will (hopefully) increase the company’s total value, and therefore the value of each share of stock, so the stockholders still gain from it.
If I may add, that is the biggest (well, only) difference between a private and a public company. The private company’s management makes decisions based on whatever their strategy is, which might looks decades into the future. It’s easier for a private company to make decisions based on a very long-term strategy. With a public company, management is being second-guessed by whoever happens to own the stock at that moment, and those people are more likely to want short-term gains. People who buy shares of GM doesn’t so much care about the company’s five-year plan if they are looking for capital gains within 18 months. The executives at Fannie Mae got bonuses in stock, so they wanted the numbers to look good *that year *and had no incentive as to the company’s health several years down the road. (There are certainly exceptions; Warren Buffett takes the long view. That’s why Berkshire Hathaway never splits. Today it closed at $82,200 per share. Buffett doesn’t want day traders messing with his stock, he wants real investors who are in for the long haul.)
Private companies have stock too, but the stock is valued by a financial analysis and not the whims of the free market. Before SAIC’s IPO a couple of year ago, they were one of the largest private companies and employees owned the stock. An accounting firm determined the stock value periodically (annually or quarterly). Mars (y’know, Snickers bars) is one of top five privately held companies.
The transfer agent is a company which provides services to a company’s shareholders. The transfer agent will keep track of who owns shares in the company as well as paying dividends.
Basically, the company can set up a distinction where some shares have a different level of ‘voting rights’ than their share of the company in all other respects. So, if the Ford motor company was broken down like this, for an example:
100 class B shares, (held by the Ford family), with 6x voting rights each
900 class A shares, (held by the general public.)
Then the family would essentially hold 500 votes out of 1400, or around 40% - definitely a controlling stake in the company, though not enough to vote out the entire general public if a massive proxy drive against them got started.
I have to say, though, that I wonder exactly what the ‘ordinary rights’ of stock in a company are considered to be, outside of voting. I suppose that someone with 10 class A shares is entitled to 1% of any dividends that are paid out - but the family could probably choose not to pay out dividends if they didn’t want to. That person would also be entitled to 1% of the company assets if it dissolved, and there was anything left after the creditors were paid off.
The best answer I’ve ever heard as to why stocks have any value, though, is that they represent an option on control of the company. In a situation like the above, I would tend to consider the real worth of the share classes as closer to what the voting rights say and not the ‘official’ reckoning.
