Investing 101: Common stocks – What they are, why to invest
WASHINGTON. In a related pair of Investing 101 columns (here and here) we explained in a general way the difference between full service and discount brokerage houses. Today’s installment gets down to the nit and the grit for investors and traders alike: the (sometimes) Wonderful World of Common Stocks. Common stocks are primarily what most new and veteran investors buy and sell in their brokerage accounts.
The reason for this is quite simple. If investors do their homework, consult or read up on related investing advice and are in tune with Mr. Market, they have reasonably good odds of getting significantly better investment returns from common stocks than they’ll get in a bank savings or investment account.
To invest successfully in common stocks, you need to know what you’re buying and why. So let’s start at the beginning, at least for the sake of our investing newbies. They’re no longer teaching this stuff in school.
Common Stocks and Securities in general
For our purposes, the general term security refers to any tradable financial asset.
A share of common stock is the share of a security that represents corporate equity ownership by an investor of an exchange-listed company. An exchange-listed company is, in turn, a company whose shares, i.e.,common stock, trade openly on public markets or exchanges either in the U.S. or abroad.
In short, each share of Company X that you own represents a percentage of all shares owned by all investors in Company X. Thus, as a part-owner of Company X, you get to participate in the triumphs – and the failures – of that company as it works each fiscal year to make money for its shareholders.
We should note at this point that many privately-held companies also issue shares to their investors. But they aren’t common stocks. They are privately-held shares of stock. As privately-held companies, these companies don’t have to disclose profits or losses, or pretty much any information to the public. And again, their shares do not trade publicly.
Examples of large, privately-held companies include agribusiness giant Cargill and the large, internationally-known confectionary and pet food conglomerate Mars. Big as they are, their companies’ shares are not publicly traded. That’s why you don’t read about them a lot in the financial pages.
Now, let’s explore the major characteristics of a share of common stock.
Shares of common stock are voting shares. Mostly.
What do you actually get when you own a share of common stock? First and foremost, you actually own a piece—albeit a very tiny piece—of a publicly traded company. Each piece, or share, of common stock you own generally entitles you to vote your shares on various corporate matters during the required annual meetings that a listed company holds each year.
Classes of shares: Something I don’t like
Each common share equals one vote. Except that sometimes, it doesn’t. A number of newer, mostly tech companies have gone public with two or more “classes” of shares. As in “Class A shares, “Class B Shares,” and so forth. Typically, this kind of structure gets created so that insiders and owners of Company X can never be outvoted by you and me.
Typically, one class of shares – let’s say those Class A shares – is allocated to little guys like you and me. The other class of shares – let’s say those Class B shares – are for the insiders and bigwigs. What that often means is that yes, you and I, the class A shareholders, do indeed get one vote per share, which is still the usual arrangement with most companies. But those very special Class B shareholders frequently get 10 votes – that’s t-e-nvotes per share.
In other words, if something controversial comes up for a vote at the annual meeting, you and I, those lowly A share holders, will never win the vote. We’ll get overwhelmed by the B share holders. As the company intended.
Classes of shares continued: Why I don’t like them
Personally, I distrust this kind of stock class arrangement. To me it effectively means the owners of Company X are happy to get our investment in their company. But no way do they want small owners to have any say whatever in corporate matters, even if current ownership is wrecking the company.
The relatively new shares of once-hot social networking company Snap, Inc. (trading symbol: SNAP) – the parent company of Snapchat – is a current example of this phenomenon. Currently at least, know-it-all management is a disaster. The common shares reflect this as they sink slowly into the sunset. Meanwhile, there’s no way hapless Snapchat fans that invested in this dog of a stock can do anything about their plight except sell for a loss.
I’ll have more to say about things like this later in this series.
Annual meetings and voting your shares
Matters you can vote on in annual or special meetings generally include choosing or re-electing members of the company’s board of directors and their respective terms. Other items can include changes in corporate compensation and amendments to the company’s by-laws.
You can actually attend these meetings if you live nearby where they’re held. Otherwise, you can vote by proxy via the U.S. Mails. Or, more recently, you can log onto a secure website to register your vote and not worry about getting all that paperwork in the mail.
Additional items shareholders vote on, including sometimes-outlandish items proposed by corporate gadflies, can also be proposed. On rare occasions, shareholders might also have to vote yes or no on whether or not their company should accept a takeover bid by another. (Helpful hint:If this will make you a lot of money and if you don’t anticipate a higher bid, I’d vote yes! But that’s up to you.)
In reality, however, even if you hold a few thousand shares of a company, which seems like quite a lot, your vote may not mean a whole lot, given that larger companies in particular often have millions of shares of stock that are publicly traded.
But you should always vote in these annual elections just the same. At the very least, reading annual corporate reports and meeting agendas before you cast your shares / votes is educational. And it can provide you with tremendous insight into exactly how the company operates. Plus, if the vote on an issue is tight – as has happened with some frequency lately – your vote(s) might actually make a difference. Think Election 2016.
There’s one more addition to the shareholder class nonsense described above. I’ve also observed an irritating increase in the number of non-voting or “minimally voting” shares sold to the public. In these situations, those A shares or their equivalent get a fractional vote or no vote at all. This tends to occur in initial offerings of the latest hot new tech stocks.
There’s no law that prevents a company from selling these kinds of shares to you, of course. But personally, I don’t much like them. To me, such shares of common stock do indicate that the company sincerely wants your money. But then, ownership wants you to shut up while they decide what to do with your money. Your opinion doesn’t count.
So, then, are there any circumstances where you would you buy those offensive “A” shares? The answer is relatively straightforward. Say the offending company regularly makes money for its A and B shareholders alike. If the stock increases in value, shareholders typically don’t care too much about their voting rights.
That said, I still don’t like this share class thing very much. My personal preference is generally to avoid these stocks.
But, there might occasionally be a realistic opportunity to make real money on such shares. In that case, the professional investor won’t split moral hairs and will make the investment.
— Next: With common stocks, two money making games are afoot – Dividends and capital gains.