What you actually own when you buy a share

A share is not a number on a screen that goes up and down. It is a legal claim on a slice of a real business: its factories, its brands, its customers, its debts, and above all the cash it will produce in the future. Most of investing's worst mistakes begin with forgetting this.

What you actually own

If a company has issued 100 shares and you own one, you own 1% of that company. Not 1% of its share price, 1% of the business. That entitles you to precisely three things.

• A claim on residual profits. After the company pays its staff, suppliers, lenders and the taxman, whatever is left belongs to shareholders. It can be paid out as a dividend or kept and reinvested. Either way, it is yours.
• A vote. One share, one vote, on who runs the board and on major decisions. In practice small shareholders rarely swing anything, but the right is real.
• A claim on what is left if it all ends. If the company is wound up, shareholders are paid last, after every lender and creditor. Frequently that means nothing at all.

Why the price moves when nothing happened

The business changes slowly. The price changes every second. That gap is the source of endless confusion.

A share price is not a measurement of what a company is worth. It is the price at which the most eager buyer and the most eager seller happened to agree, a moment ago. It reflects the crowd's expectations of the future, and expectations are volatile in a way that factories and brands are not.

In the short run the market is a voting machine. In the long run it is a weighing machine.

Benjamin Graham's line is quoted to death because it is exactly right. Over days, prices are a popularity contest. Over a decade, they converge on what the business actually earned. Your edge as a small investor is that you are allowed to wait, and most professionals are not.

What a share is not

• It is not a promise. Nobody owes you a return. There is no interest rate on equity, no maturity date, no guarantee.
• It is not a ticket that knows you own it. A stock cannot go up because you need it to. It is not aware of your entry price.
• It is not a lottery ticket, unless you use it as one. Buying a company you cannot describe in one sentence is gambling with extra steps.