The ownership of a stock company is divided into shares. The company stock, also known as capital stock, is comprised of all of the shares. Each share represent a fraction of ownership. If you own a company share, you own a fraction of that company.
In colloquial speech, the terms stocks and shares are sometimes used interchangeably, e.g. ”I bought stocks in Apple” and ”I bought Apple shares.”
Are all shares the same in a company?
No, different shares in the same company can give the owner different rights, e.g. when it comes to rights such as voting power at shareholder meetings and the rights to dividends if dividend payments are made by the company.
All shares within the same class of shares have the same rights.
Exactly which classes of shares that are permitted is ultimately determined by law and will therefore vary based on which jurisdictions the company is based in. Stock exchanges can also have rules for the companies that wish to be traded on them.
Companies that issue at least two different classes of shares need to different between them to avoid confusion.
The common shares in Berkshire-Hathaway Inc. are Class A, and their stock ticker is NYSE:: BRK.A.
NYSE:: BRK.B is short for the Berkshire-Hathaway Inc. Class B share listed at the New York Stock Exchange.
NYSE:: BRK.B are preferred shares (preference shares) in Berkshire-Hathaway Inc.
Common stock vs preferred stock
The standard form of common share gives the holder voting rights when corporate decisions are made through shareholder voting.
A preferred share is typically without voting rights. So, why would anyone invest in preferred shares instead of buying common shares? Because, if dividends are paid out, preferred shares give the holder the right to receive a certain level of dividend payments before any payments are made to the common share holders.
An investor that is interested in dividend payments, but do not want to involve themselves in how the company is run, can therefore decide to buy preferred shares.
Note: Preferred shares can be created in a way that makes them a sort of hybrid between shares and bonds with fixed returns.
Convertible preferred shares
In many jurisdictions, a stock company can decide to issued convertible preferred shares. This is preferred shares that, under certain circumstances, can be converted into a fixed number of common shares – if the shareholder want that to happen. Typically, convertible preferred shares can be converted after a predetermined date.
Convertible preferred shares are the same thing as convertible preference shares.
Understanding stock companies
A stock company, formally known as a joint-stock company, is a business entity where shares of the company stock can be bought and sold. If you own a share, you are a shareholder, and you own a part of the company.
One of the advantages of modern-day limited liability stock companies is that you, the investor, can decide exactly how much money you are willing to risk. If someone is offering you to invest in a stock company, e.g. the start-up BLABLABLA that has some interesting ideas for a new mobile app, you can decide that you wish to buy shares in BLABLABLA for $50,000 and not a penny more. If the business fails and files for bankruptcy, you have not lost more than your $50,000. As long as you have acted in a legal manner, other businesses have no right to demand that you pay BLABLABLA´s outstanding debts.
One example of an early ancestor of the modern-day stock company is the commenda, which developed in Italy around the 10th century CE. The commenda was essentially a contract between an investing partner and a travelling partner to conduct one commercial venture – typically a trip overseas to bring back valuable goods that were to be sold in Europe for a profit. The investing partner did not employ the travelling partner to transport goods – they were both business partners in a common venture and the contract would regulate how profits were to be shared.