What it means to buy a companys stock Stocks and bonds Finance Capital Markets Khan Academy
Voiceover: Let's talk alittle bit about what it means to own shares or stock in a company, so shares or stock. I think we all have a general sense, but what I want to do in this tutorial is make it a little bit more tangible to really understandexactly what you're buying when you buy a share of stock.
So the general sense, and this is exactly what it really is, is when you buy stock or you buy shares, you're essentially becoming a partial or a part owner of the company. Part owner of company. Just to contrast this with bonds because they're often kind of used
in the same phrasing, quot;Oh, I'm gonna go buysome stocks or bonds,quot; or quot;I deal with stocks and bonds.quot; Bonds. Bonds, you become partlender to the company. Part lender to the company. So, for example, if you buy a, well, I'll just say a face value bond
of, let's say, it's $10. Let's say it's $1,000, and there's 1,000 people who do that. Each of you all are lending$1,000 to the company and since there's 1,000 of you, you're lending $1 million to the company. I'm not going to go into detail in that because the focus of thisis going to be stock,
but it's good to keep in mind that they're very different things. Here, you're owning the company. Here, you're lending to the company. So just to make this alittle bit more tangible of exactly what we're owning, let me draw a simple balance sheet for some company X.
So this is Company . Let me do a new color. Let's say we're dealingwith Company X right here, and let's say if we lookedat Company X's assets, and when we talk about assets, it really is the same thing that we mean in the real world, or in our everyday life when we talk about assets.
Earnings Per Share Basic Lesson 2
Now, as we go through this, what we need todo is we need to kinda set it up so that it's understandable. So, what I'm gonna do is I'mgonna set up here the two types called basic and diluted. And as you calculate it, it'swhaté It's something divided by something to get your earnings per share.So as we look at this, I'm gonna start here with my basic earnings per share, which issimple. And that is your basic or your simple earnings per share. That assumes there's nothingpotentially dilutive. Then, we're gonna go on to our diluted earnings per share, whichis your complex system, which is anyone who could convert, does so. So, we're gonna gothrough this and we're gonna calculate it.
We're gonna have this divided by something.So, up here we're gonna have the dollars and we're gonna divide it by a certain numberof shares. Remember in, what was it, stockholders equity,we did a long, taskbased simulation, and one of the questions asked you to calculateearnings per share, or book value per share. So, there's something per share. It's dollarsdivided something equals dollars, right. So, like dollars over nondollars equals dollars.So, dollars over shares equals dollars per share. That's what we're gonna be trying tocalculate. Now, in looking at this, first of all, westart out with your simpler basic. Now, when
you do a formula, the top is the numerator,and I'll put that here, numerator. The bottom is dddddown, denominator. Okay, just incase you didn't know that, or maybe in your country you don't use that terminology. Numeratortop, dddddown denominator. So in a fraction, like four over two, that's the numerator,that's the denominator, and that equals two. So, numerator, denominator, so as we go throughthis, the numerator is the top, dddddown denominator.In the numerator, we're gonna start out with our net income. So, we have our net income,and that's our total net income minus something. And this minus something is going to be minuspreferred dividends. So this is minus the
preferred dividends, whyé Because we're tryingto figure out the money we have available to give to the common shareholders.Who gets paid first, preferred. So, preferred gets first, that money's not there for thecommon. So, we're gonna take our net income, we're gonna have to take out our preferreddividends. But, I'm gonna put a little A here because I want to note what this A means.What the A says is with preferred, remember we talked about preferred stock, we said itcould be what, cumulative or noncumulative. Cumulative or noncumulative. So, cumulativemeans that if you don't declare it, you owe it the next year or the next.When you finally declare a dividend, it accumulates
in arrears, where's your rear, behind you.So, it's old, behind dividends, you owe that money eventually. So, it's not a liability'til it's declared, but if it's not declared, it's cumulative, we still footnote the factthat eventually we're gonna owe this. That is called cumulative. Noncumulative meanshey, if you don't declare this dividend, it is bbbye, bye, bye, lost forever.So, let's think about it, if it's cumulative, will you eventually owe it, yes. So, I'm gonnatake it out, if it's cumulative, you're gonna take that out, cumulative, whether declaredor not. So even if it's declared, to declare or not declare, that is the question, right,remember Shakespeareé To be or not to be,
to declare or not to. So, even if it's notdeclared, you still take it out. If it's noncumulative, only if declared, why is thaté Because ifit's noncumulative, if you don't declare it, it's lost forever, you're never gonnaowe it. If it's cumulative but you don't declare it, you're gonna eventually owe it.So, we're gonna take it out, but for how many yearsé This is an important point, for oneyear only. And the reason I mention that is, let's think about it. If I don't declare adividend, do I take it out this yearé Yes, because let's assume it's cumulative. I don'tdeclare it, it's cumulative, you take it out. 'Cause it's theoretically as if you paid it.So then next year, we still don't declare