When you decide that you have found a good investment and believe that the company you have selected is worth your hard earned money – you will purchase shares, equity or stock in it. These words are used interchangeably and all represent the same thing – ownership. By purchasing shares you now own part of the company and you can freely say that you have a claim on the company’s assets and earnings. The more and more shares you acquire – the more ownership of the company’s assets and earnings you obtain.
By becoming an owner and having a claim to the company’s assets – you also gain the right to vote at general meetings. The more ownership you purchase, the more voting power you gain and therefore the more influence you control over the companies operation. The level of power you receive is not unlimited so that you can simply ring up the CEO or Board Members and tell them that you think the company is over or under performing – nor does it allow you to start taking chairs, desks and pot plants from the companies offices! It simply allows you to gain one vote per share on who is elected to the companies Executive Board – you hope that your votes will have enough influence to ensure that the best board is selected so the company is ultimately successful. If you only own a small amount of the overall shares and therefore only have a small amount of voting power – your votes may not have a large influence on the overall decision that is made. In this case, you can only hope that those with a lot more equity than you are voting to have the best people run the company, because it is also in their interests to do so.
It is worth mentioning at this point, that when you purchase any equity investment such as a share you are also taking onboard the risk of the company. Since you are becoming an owner, you equally bear the risk that the company may not be successful and your claim on assets should the company have to liquidate (have to sell everything and go out of business) is less than a person who chose to give a company debt financing. This means that shareholders can earn fantastic profits if the company is successful – but equally can lose if the company performs poorly.
