What you actually own when you buy a share

Most explanations of what a share is stop at the point where it starts to matter. This one carries on.

The residual claim

A company pays its suppliers, staff, lenders and tax authorities first; what remains belongs to shareholders. That ordering explains almost everything about equity returns — the claim is last in line, so it absorbs the variability that everyone ahead of it is protected from.

A small change in revenue produces a much larger proportional change in the residual, which is why share prices move more than sales figures. The compensation for accepting that position has historically been a higher long-run return than lending, though history is not a promise.

What the claim entitles you to

Ordinary shares typically carry a vote at company meetings and a right to receive dividends if the board declares them. There is no entitlement to a dividend, no entitlement to a share of assets while the company continues, and no right to demand your money back. The only way to convert a share into cash is to sell it to somebody else at whatever price they will pay.

This is why liquidity — the existence of a willing buyer — is a feature of the market rather than a property of the share.

Price is not value, and it moves for both reasons

The price reflects what buyers and sellers currently think future profits are worth, discounted for time and uncertainty. It therefore moves when expectations change, which happens far more often than the underlying business changes.

On the balance sheet, a company can have a good year while its share price falls, if the year was less good than expected. Understanding this removes a great deal of confusion about why prices react the way they do to apparently good news.

Where dilution comes from

A company can issue new shares, which divides the same residual claim among more holders. This is not theft — the money raised typically buys assets or reduces debt — but the existing holders own a smaller fraction afterwards. Share buybacks work the other way, reducing the count so each remaining share represents a larger claim.

Both are worth noticing, because per-share figures move even when the company's total profits do not.

Owning shares through funds

Most people hold equities through funds, which own many companies and issue units representing a share of the pool. The underlying claim is identical; what changes is that a single company failing removes a small fraction of your holding rather than all of it.

The legal structure differs — you own units in a fund which owns the shares — and that structure determines your rights and the applicable protections. How funds are regulated and protected varies by country, which is worth checking rather than assuming.

The right answer depends on your tax situation, which this cannot see.

What it does not entitle you to

Buying shares in a company gives you no claim on its products, no say in its day-to-day operation and no protection if it fails. In an insolvency, shareholders are paid after every creditor, which in practice usually means nothing at all. This is the risk being compensated, and any product promising equity-like returns without it deserves close examination.

Whether equities are appropriate for any particular person depends on their circumstances and horizon, which is a matter for regulated advice.

The takeaway

A share is the last claim in the queue. Everything about how it behaves follows from that position.

The decision is rarely about picking the best option — it is about avoiding the expensive one.