“So… what exactly is a share, anyway?”
We hear this question a lot from people who are in the early stages of learning about investing. It’s a perfectly valid question, which we put to our investing team.
Scott, what is a share, where do they come from, and why do companies actually issue the shares?
Yeah, Ryan, a share is what it sounds like. Literally it’s a share, a proportion of a company. Now, if you and I owned a mowing business, we might have a half-share each. So it literally is.
If we think about sharing something out, that’s the derivation of the word share as it applies to investing. Woolworths is too big for one person to own it, same with BHP, or CSL, and so it gets divided up into pieces.
Now those pieces, like talking about pizzas, sometimes we give this analogy, so one pizza, one company. Each slice of that pizza, no matter how big or small, is a share. You and I have a half share of the pizza in the lawn-mowing business, or we might have one one-millionth of a share of Woolworths. It’s a proportional ownership. It’s a way of allowing companies to get big, to have those ownership stakes traded amongst each other. It’s harder for me to sell half the lawn mowing business, but I can go and sell, one, two, a thousand shares of Woolies, backwards and forwards, on the ASX. It’s a way of allowing big businesses to be owned by small individuals in proportional parts, so that we can transact, we can get the benefit of owning those shares, particularly with dividends, and also our share of the profits that the companies deliver.
Now in terms of why they’re issued, they’re issued because those businesses want to be public companies. Now, if I own Woolworths myself and it wasn’t on the ASX, that’s a whole different thing. If I wanna find someone to buy that company it’s gonna probably come on the ASX because no one person can buy Woolies off me, but a whole lot of people can own that business. Companies issue those shares, they break themselves up, to allow that easy transfer of ownership between individuals who own parts of Woolies or fund managers who own parts of Woolies. That’s kind of what makes the capital system work, right? The ASX is there to allow us to swap ownership stakes, to allow companies to raise more money and issue more shares, so they divide the pizza up into smaller and smaller bits and issue more of those to raise more cash for their own growth opportunities.
RYAN: And is it the company itself that issues those shares?
SCOTT: Yeah, it is. So the company is, effectively, the plaything of its shareholders or share owners, and so yeah, the company simply says, “Well, I’m gonna divide myself up into more parts,” creates more slices, if you like, slices itself up more thinly and issues those shares to new shareholders.
RYAN: Okay, and as for the size of the slices themselves, you mentioned before that that represents a share, literally a share of something from the company. What is that share of?
SCOTT: It’s effectively saying Woolworths Limited, let’s use that business as an example, it might have a market capitalization of 30 billion dollars. That means it’s worth 30 billion dollars. If you buy the whole thing on the market, you have to pay 30 billion dollars to buy that company. Now let’s make it really simple. Let’s say that a billion shares worth 30 dollars each, that’s effectively the break up.
That’s the derivation, the splitting up of that pizza, in this case, a billion pieces, to allow it to be small enough for the individual shareholders to buy the shares.
RYAN: And each of those shares has an element of profit and potentially a dividend as well, attributed to it?
SCOTT: Correct, because you own, you literally legally own that very, very small portion of that business. So a proportional size of its profit, a proportional size, a piece of its dividends, go to you as the share owner.
RYAN: Excellent, and I suppose as well that there’s one more element to a share which is voting rights, and the actual ownership and control over the business itself. So, you said, a minute ago, Woolworths, it’s a 30 billion dollar company, if you own 20 shares, it’s a very small ownership. Does it give you much in terms of voting rights?
SCOTT: Individually, it doesn’t, but again, it’s like voting in democratic elections, right? Everyone says, “It’s only one vote.” Well, it is, but that one vote combined with everyone else’s one vote, determines the future of a country or in this case, a company. So, individually, can I change Woolworths strategy? No, I can’t, but if enough like-minded investors feel the same, again, democratically, that’s exactly how it works. One share, one vote. That builds a consensus at some level and let’s you influence, at least together with other shareholders, the direction of the company.
RYAN: So it is quite literally a proportional ownership?
SCOTT: Exactly what it is.
RYAN: Excellent, thanks Scott.
SCOTT: Thanks, Ryan.