Does the CEO own the company? Does the Board of Directors? And yet we always hear about CEOs getting sacked, the Board being replaced, and all those key management executives trying to please the owners. Now a simple question comes to mind: who really owns those multi billion companies?
The answer is simple: It’s the stockholders.
To understand the concept, kindly read this article that explains how the accounting equation works. Done? Good. Moving on – the equity section is usually divided into different stocks or shares. In the simple world, a business is set up by the owner. Everything the owner gives to the company is added to equity. So for example, he gives $1,000 to the company. The assets go up by $1,000, the equity goes up by $1,000, and the equation is still balanced. Now, that $1,000 equity may be divided to, say, 10 stocks – so it is $100 per stock. The owner decides to sell that stock. When he sells one stock, the $100 of equity will be transferred to the new owner. But how much is the original owner paid?
Let’s say that two people want that one stock from the original owner. One offers $100, and another offers $150. The original owner will probably sell to the second buyer for $150. Hence, the original owner receives profit of $50. In the company’s records, however, only the $100 share is transferred.
Suppose that the buyer, the second owner, sells this stock to another buyer for $500 – he then gains a profit of $350. And that, ladies and gentlemen, is the concept of trading.
Going back, the third buyer now has ownership of that one stock. Given that there are 10 stocks, he gets 10% of control. How is this important? He can now be a director of the board, or vote for another who he wants to be the director. A lot of corporate functions are also approved by the stockholders – usually by majority vote. So if the owner of the stock is not happy with the board, he can vote for another.
Hence, the Board of Directors want to make the rest of the stockholders happy. The Board appoints the Executive Committee like the CEO, who also wants to make the Board of Directors, and in effect, the stockholders happy.
Therefore, if you own a stock, then you actually are the owner of the company. The difficulty is owning a significant number of stock that your decisions will be controlling. For example, if you do not sell the 51% of your stocks, then you will always have the majority vote.
Now, do this is a bigger scale – like 10 billion shares. That’s how the big companies work. But as it takes one step forward to start the race, it also takes buying one share to owning a company. Imagine being the boss of Bill Gates – one share at a time. Learn to grow your money.
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