Shares of stock for many companies are available for sale.  For other companies, shares of stock cannot be purchased.  Why?  What is the difference?  

You see companies around you all the time.  Those include businesses such as a local restaurant, a local repair garage, an attorney’s office, a golf course, and more.  A typical town has many private businesses like these.  The owners may be your friends or acquaintances.  

But a company’s owner may decide to “grow the business” by opening additional locations – additional restaurants, additional stores, additional plants or factories, etc.  

Business conditions can often require a sizeable expansion.  It is not unusual for a company to need money, but the amount needed is too great to borrow from a bank or lender; the result would be such a high level of debt that the company would be unable to repay it, and could go bankrupt.  

The alternative to obtaining a loan is to sell part of the company to someone else.  The purchaser pays money into the company in exchange for that (partial) ownership.

That purchase may be an individual or a group of specific individuals; in that case, the company is still considered to be privately owned.  

Alternatively, an “Initial Public Offering” (an “IPO”) may be held, transforming the company from being privately-held into a publicly-traded company – a company whose stock you can purchase, if you desire to do so.

A company whose stock is publicly traded must adhere to certain legal guidelines and requirements defined by the Securities and Exchange Commission (the “SEC”). The SEC’s efforts are intended to assure that people who buy stock are getting what they pay for; that the company’s financial reporting is accurate and above-board; that there is no hidden agenda that will be contrary to the interest of stockholders – i.e., to people who, after all, are the owners of the company.

A business is composed not only of its executive management – its Chief Executive Officer (its CEO), its Chief of Operations (COO), its Chief Financial Officer (CFO), and others, its lower management, office staff, and plant workers, but also each company has a Board of Directors.

The Board of Directors oversee the company’s progress, activities, profitability, general health, and staying on-course for its stated purpose.  The head of the Board of Directors is the Chairman.  Most Directors are not company employees, excepting the company’s CEO, who is usually a member of the Board.  Most Directors actually work for other companies, or for investment companies, such as mutual funds, which own a large quantity of the company’s stock.  

Potential Directors are sought who have a substantial level of experience that gives them a good perspective on factors that can have an impact on the ongoing success or failure of the company.

Perhaps most importantly, the Board reviews the CEO’s success at running the company.  That includes making sure the CEO’s actions are in line with the company’s focus and goals, the company’s current profitability, the CEO’s current and future plans for the company, and how those plans will affect the company’s growth and value as an investment for stockholders.  The CEO works “at the pleasure” of the Board; i.e., he is under contract by the Board to be the CEO, so long as the Board judges it to be in the stockholders’ interest for him to continue as CEO.

The Board of Directors is elected by the company’s owners.  For a publicly-traded company, that means Board members are elected by those people who hold shares in the company.  If you hold shares in a company (whether in a 401k, an IRA, or in an after-tax account) then you should expect to receive mail from the company letting you know who the nominees are to be elected or re-elected to the Board of Directors, whenever those elections are scheduled to take place.  

When you start buying and selling stocks, it quickly becomes clear that the rise and fall of the price of a stock rarely seems to make sense.  The price of a stock is affected by any news about that company, news about its competitors and that industry as a whole, economic news, political news, the news from other countries, related or not, and even news about bad weather.  

Stock prices can also be affected by the news that a big investor (e.g., Warren Buffett, Bill Ackman) has decided to buy or sell a large number of shares of that company, or of one of its competitors.

All of these can have an impact on stock prices, as others like yourself make their own decisions about which stocks to buy, and which stocks to sell – and at what price.

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