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Want to own a company? Buy stock!

This article discusses why share holders should think and act like owners of companies. It also describes how buying stocks means an ownership interest in a company.

Have you ever dreamt of owning a company? Not working somewhere for a salary, but owning something of your own? Its really difficult, and it involves a lot of hassle. But there is an easier way of partially owning a company.

Regulars to this website would have guessed it right – it is through buying stocks. Let me explain how.

 

Who owns shares or stocks?

When a company is incorporated (or formed), it needs capital (or money) for buying fixed assets like plant, machinery and offices, and for its day-to-day operation. Various people, called the company’s promoters, contribute funds for this. These people, in turn, are issues shares or stock in the company. The number of shares issued is proportional to the funds contributed by them.

A company may decide to go public, in which case, its shares are traded on the stock markets. To become publicly traded, the company has to come out with an Initial Public Offering (IPO), in which the shares are issued to the general public and institutions in return for their funds.

 

What do shares or stocks represent?

Shares represent an ownership interest in the company. What does this mean? This means that if you own shares in a company, you own a part of it.

Your ownership interest in the company is proportional to the number of shares held by you.

For example, if a company has issued a total of 100 shares, and you own 1 share of this company, you are 1/100th owner of the company. In other words, you own 1% of the company.

Now lets consider a real life situation. A company has issued 1,00,00,000 shares. You own 1,000 shares in this company. Thus, you own 0.01% of the company. If you had owned 10,000 shares, you would have been a 0.1% owner of the company.

This number might seem small (Remember, for most investors, the ownership interest would be tiny, just like this example), but the important thing to remember is that even if you own 1 share in a company, you are a part owner of that company.

When we say that Azeem Premji owns WIPRO, it just means that he (and the people who want him to be the owner – generally called “People acting in concert”) owns a majority in WIPRO. But if you own even one share in WIPRO, you are also an owner of WIPRO. This is the reason why all shareholders get a voting right in the company’s annual general meetings (AGMs).

 

Implications of being an owner

The fact that owning shares makes you an owner of the company has great implications for long term investors.

The most important thing is to think and act like an owner. This implies that you take a long term view of the company and its industry, just like an owner.

Suppose you own shares of Reliance Industries. The stock markets go down, and the stock price of Reliance also goes down. What does Mukesh Ambani, who is the majority owner of this company, do in this case? Does he sell all the shares so that he can buy them at a lesser price later? No! He keeps holding these shares, because he knows that the long term future of the company is very good. If at all, he would buy more shares from the market, because reduction in the share price without any change in fundamentals presents a great opportunity to buy a portion of a great company at a discount!

And what would you do in the same scenario? Most of us would sell the shares, so that we can buy them at lesser price at a later time. But this is not correct for a long term investor. You need to think like the owner of the company, and take your decisions accordingly. If you think the fundamentals have not changed, hold on to the shares, or buy even more. (Remember, long term investments in shares can give extraordinary returns).

Only when you think like an owner, you would be able to take part in the long term growth of the company. If you buy and sell shares based just on the market movements, you may make small profits here and there. But if you think and act like an owner, your wealth would grow with the company because you would participate in the long term growth of the company.

 

An interesting example

When Tata Steel issued shares to the general public many decades back, many Parsi investors invested in it with a very long term view. As soon as they received their share certificates, they tore them off – because they never intended to sell them! Today, the heirs of these investors own thousands of shares in Tata Steel, which is one of the best companies in India!

You need not go to this extent, of course! But the learning is that you need to think long term. Invest only in companies that are fundamentally strong, and are leaders in their industries. Pick stable companies with good long term potential.

Whenever you are considering to buy the stock of a company, ask this question: If I have the opportunity to become an owner of one and only one company, would I buy this company?

Happy investing!

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