What a share really is: ownership, shareholder rights and how companies raise capital

What you will learn

• What a share represents legally and economically
• The main rights of a shareholder in a German stock corporation
• The difference between ordinary shares, preference shares, bearer and registered shares
• How a capital increase dilutes ownership and how a subscription right protects you

Explanation

A share (German: Aktie) is a unit of ownership in a stock corporation. In Germany the most common listed legal form is the Aktiengesellschaft (AG); the European company (SE) is also common. If a company has 10,000,000 shares and you own 1,000, you own 0.01% of the company. You do not own a desk or a machine. You own a fraction of the equity, which is what remains for owners after all debts are paid.

This has an important consequence: shareholders are residual claimants. Employees, suppliers, tax authorities and lenders are paid first. Owners receive what is left, which can be a lot or nothing. In an insolvency, shareholders usually receive little or nothing. In exchange, their liability is limited: you cannot lose more than the money you paid for the shares (unless you used borrowed money).

Shareholder rights

In a German AG, the rights come mainly from the Stock Corporation Act (Aktiengesetz, AktG) and the company's articles of association. The most important ones are:

• Right to a share of profits: the annual general meeting (AGM, German: Hauptversammlung) decides how much of the distributable profit is paid as a dividend. There is no automatic right to a dividend.
• Voting rights: at the AGM shareholders vote, for example, on the use of profits, the discharge (Entlastung) of the boards, the auditor, and changes to the share capital.
• Information right: shareholders may ask questions at the AGM about matters on the agenda.
• Subscription right (Bezugsrecht): when new shares are issued, existing owners normally have the right to buy them first, in proportion to their holding. The AGM can exclude this right under certain legal conditions.
• Share of liquidation proceeds if the company is wound up after all creditors are paid.

German AGs have a two-tier board: the management board (Vorstand) runs the company, and the supervisory board (Aufsichtsrat) appoints and controls the management board. Shareholders elect their representatives on the supervisory board, so their influence is indirect.

Types of shares

• Ordinary shares (Stammaktien) carry voting rights.
• Preference shares (Vorzugsaktien) usually have no voting right but a preferred claim on dividends. Some German companies list both, so check which one you are buying.
• Bearer shares (Inhaberaktien) belong to whoever holds them; registered shares (Namensaktien) are recorded in the company's share register with the owner's name.

How companies raise capital

A company can finance itself with debt (loans, bonds: must be repaid with interest) or equity (new shares: no repayment, but new owners share future profits). The first public sale of shares is the initial public offering (IPO), covered in the next lesson. Later, a listed company can issue new shares in a capital increase. The company receives cash only when it issues new shares. When you buy existing shares on the exchange, your money goes to the seller, not to the company.

New shares cause dilution: each existing share represents a smaller fraction of the company. The subscription ratio tells you how many old shares entitle you to buy one new share.

Worked example

Hypothetical example: Muster AG has 10,000,000 shares. You own 1,000 shares. The company issues 2,000,000 new shares at €20 per share. Fees, taxes and price changes are ignored.

1. Your ownership before: 1,000 ÷ 10,000,000 = 0.0100%.
2. Money raised by the company: 2,000,000 × €20 = €40,000,000 (before issuing costs).
3. Shares after the issue: 10,000,000 + 2,000,000 = 12,000,000.
4. If you do not buy: 1,000 ÷ 12,000,000 = 0.0083% (rounded). Your share of the company falls by about one sixth.
5. Subscription ratio: 10,000,000 ÷ 2,000,000 = 5 : 1. Five old shares allow you to buy one new share.
6. To keep 0.0100%, you buy 1,000 ÷ 5 = 200 new shares for 200 × €20 = €4,000. You then hold 1,200 ÷ 12,000,000 = 0.0100%.

Dilution is not automatically bad. If the company invests the €40 million well, the value of each share can rise. If it wastes the money, existing owners lose.

Common mistake

Practice activity

Hypothetical: a company has 50,000,000 shares. You own 5,000. It issues 10,000,000 new shares at €8 with a subscription right. Calculate (a) your ownership before, (b) your ownership after if you do nothing, (c) the subscription ratio, (d) how many new shares and how much money you need to keep your ownership.

Key takeaways

• A share is a fractional ownership claim on equity, the residual value after all creditors.
• Shareholders vote at the AGM; dividends are decided there and are never guaranteed.
• Only newly issued shares bring money to the company; they dilute existing owners.
• The subscription right lets you keep your percentage if you pay for new shares.

Next step

In the next lesson you will see how shares come to the exchange and how the exchange matches buyers and sellers.