What is a Stock?
Officially, a stock is ownership of a corporation represented by shares that are a claim on the corporation's earnings and assets. That's it.
There are actually several different kinds of stock. If you are thinking about your right to vote and elect officers (board members), you are thinking about common stock. There is also preferred stock, and several variations and derivatives. For now, we focus on common stock.
In the real world, stock bears very little practical resemblance to its definition. Let's start at the beginning. Technically, and legally, stock IS a partial ownership of a corporation. This is necessary to maintain the fiction under which our capital markets function. But what does "stock" mean in real life?
First, let's get rid of that pesky "technically correct" definition. As a stock holder you actually have none of the rights or powers that are traditionally associated with the ownership of something. You have no say in how the corporation is run. You have no say in how funds are allocated or if or when you are paid a return on your investment. Moving further into the official definition, your claim on earnings and assets is non-existent. If the company goes bankrupt or otherwise dissolves, common stock holders are virtually last in line for the disbursement of company assets. You would be hard pressed to come up with anything but the most trivial example of any corporation in the last fifty years to go out of business where the common stock holders receiving anything for their shares of stock. Here in the real world, bond holders are near the front of the line and when a company goes under they usually only get some of their money. If the guys up front only get partial payback you can be pretty sure the guys near the end won't be getting anything. In real life, the end of the company means your so called claim on assets and earnings is worth zero, zip, nadda, nothing.
So if a stock's ownership right is worthless when a company goes under, what about when the corporation is in business?
For a recent example, take the 2007 episode during which Kirk Kerkorian bought millions of shares of GM stock. During that time, GM simply continued business as normal, virtually ignoring any input Kerkorian had. Finally, as his stake in the company reached nearly 10%, GM agreed to put one of his allies on the board. That's right, 1. Despite owning nearly 10% of the company, the entire sum total of ownership qualities Kerkorian was able to effectuate on General Motors was to put one person on a thirteen member board where he was easily out voted.
If you aren't impressed by Mr. Kerkorian's stake, consider this. No one on the whole planet, not and people, not mutual funds, not institutions owned more shares than he did at the time. In other words, the biggest shareholder in the world, the guy with more ownership of the company than anyone else couldn't do anything.
This begs the question: What exactly is this ownership worth? The answer is that the so called ownership of a corporation conferred upon it's common stock holders is nothing but symbolic.
So what about that right to elect officers and board members? This is what the inhabitants of the academic world hang their hats on when describing how stock is ownership. But, in reality, this right is virtually unusable.
We've all seen that scene in the movies or in a book where the scrappy underdog suddenly springs the news on his boss that he has acquired 50.1% of the stock and oh, by the way, he's fired. Here in the real world, this is nothing more than a writer's fantasy. A whole slew of securities regulations require reporting of certain stock activities, including acquiring more than a certain amount, so the whole secret thing is out. Then there is the reality that 50% of most publicly traded company's stock would cost more money than even the largest banks can get in liquid form. So, in the end it all comes down to the nice normal election of those directors.
So, this is where the ownership kicks in, right? Again, certain realities come into play. Guess who sets the rules for the board of directors elections? The company (current management). Most of those rules ensure that no outsiders are ever elected to the board without permission. These rules often include things like rotating elections where only two or three board members are up for election each time so that even if you did manage to force two or three of your allies onto the board, the other ten members can still out vote them. Also, it is up to the company to decide the method and timing of the elections. Postponing them while the company shores up its stock ownership is not out of the question. Another pin waiting to burst the bubble of corporate democracy is that the vast majority of shareholders do not vote their shares themselves. If you own stock through a mutual fund, the mutual fund votes for you, same thing with a pension fund.
Finally, we come to the vast arsenal of anti-takeover laws and tricks at the disposal of virtually all companies. Ever wonder why everyone incorporates in Delaware regardless of where their corporate headquarters is? Laws which clearly favor the company are the main reason, including all kinds of anti-takeover rules, and regulations. If that weren't enough, there is the wide array of tricks known as "poison pills" in which something unpleasant (like taking on a huge amount of debt) is triggered if anyone acquires more than a certain percentage of the stock, thereby virtually guaranteeing that the company cannot be taken over without the blessing of the current management.
What do you think of your corporate ownership now? Did I hear someone ask about dividends? Sure, as a shareholder you are legally entitled to your share of any declared dividends. But, who decides when, if, and how much dividend there will be? Not the shareholders. You can complain if you want, but there isn't anything you can do about it.
So, if in real life, a stock isn't really ownership, and it isn't really a claim on property, what is it exactly? It is a proxy for speculating on the current and future value of the company. Notice, that it does not determine the company's true value, nor does it give you any power in determining the value. On any given day, the cumulative value that the stock assigns to a company can swing wildly. For example, GM has 566 million shares outstanding. The math doesn't work exactly this way, but to a reasonable approximation, it can be said that if GM's stock goes up by $1 then the company is worth $566 million more than the day before. Conversely if the stock goes down by $1 then the company is worth $566 million less than the day before. A movement like this happens all the time for no reason, and with no new information. Does is actually make sense that GM is worth half of a billion dollars less just because it is Tuesday?
So, what is the point of all of this?
If you are not under any delusions about what stock ownership really is in real life, then you can be a better investor. Know that every time you buy a share of stock you are doing nothing more than speculating that the public perception of that company will increase over time. That is it. When you understand this reality, you are ready to invest. Otherwise, you are better off putting your money into vehicles where other people take care of the specifics and waiting for the numbers to work out in your favor.