Author’s Note:
I am posting a text version of this entire book on Substack, and video versions on YouTube. Email ken@stltest.net for details on my 5th book’s publishing date in late ’24 or early ’25.
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I drink two sodas each day- which concerns my wife.
She sends me articles with titles like: “10 Reasons Why Soda Is Killing You”.
Subtle…
Many investors own common stock, and I’ll explain the different types of accounts that are used to own stock later. For now, I’ll explain the basics of common stock using PepsiCo as an example.
How companies raise money to operate
There are two basic ways that a company can raise money to run a business: Issue debt or sell stock to the public. The money raised is referred to as capital. Most of the investments you’ll consider are some combination of stocks and bonds.
Years ago, PepsiCo issued common stock to the public for the first time. If Sally purchases common stock, she becomes an owner of PepsiCo- a shareholder.
Shareholder rights
Sally has some rights as a shareholder:
Voting rights: Shareholders vote on major business decisions, such as electing the board of directors or approving a merger with another company. PepsiCo sends Sally documentation that allows her to vote her shares at the annual meeting. She doesn’t need to be present at the meeting to vote.
Cash dividends: Dividends are a share of company profits (earnings), and PepsiCo may pay a portion of profits as a cash dividend. A company does not have to pay a dividend and many firms retain (keep) profits for use in the business.
Stock dividend: A company may reward you as a shareholder by issuing more shares of stock to existing shareholders. For example, you might receive 1 share of stock for every 10 shares you own. I’ll cover more on stock dividends later in the book.
Stock sale: You have the right to sell your common stock and you can sell stock on most business days. Shareholders can profit by selling stock for gain.
If you hold common stock for years, you can earn either cash dividends, stock dividends, or both over those years. You can profit, even if the stock price stays the same or declines.
Stock and company liquidations
Common stock owners are last in line to receive assets if a company liquidates.
It’s unusual, but a concept you need to know.
If a company is forced to sell all of its assets- who gets the assets?
Secured creditors: Creditors who own an interest in a particular company asset are paid first. If a bank has a mortgage on the company headquarters, they have the right to the sales proceeds when the building is sold.
Bondholders: I’ll explain bonds in an upcoming chapter. A corporate bond may be backed by specific assets (building, equipment), or an unsecured bond backed by a company’s “ability to pay”. Credit card debts are usually unsecured loans, as an example.
Common stockholders: If you own common stock, you are last in line to receive assets if the company liquidates.
Again, this situation is unusual, but companies do go bankrupt. A large, profitable business like PepsiCo isn’t much of a risk, but less profitable companies might be.
Proof of ownership
When you buy stock, what’s your proof of ownership?
Years ago, most stock certificates were issued in physical form. Today, nearly all stock certificates are in book entry form (a computerized certificate). A registrar (an independent third party) is responsible for tracking the ownership of each common stock share and they issue stock certificates.