The four rights a share gives you
A share is a piece of ownership in a company. But “owning a company” breaks down into a few concrete rights. Shareholders actually hold four main rights. (This chapter follows Korean company law; most points apply broadly elsewhere.)
- Right to dividends: when the company decides to distribute profit, you receive a share in proportion to your holding. Whether and how much to pay is decided by the company (board and shareholders’ meeting), so it is not a “right to demand dividends”.
- Right to residual assets: when the company winds up, you receive a share of what is left after all debts are paid. Shareholders rank behind creditors, so when a company gets into trouble, the shareholders’ portion is the first to disappear.
- Voting rights: the right to vote at shareholders’ meetings on items such as electing directors, dividends, changes to the articles and mergers — usually one vote per share.
- Pre-emptive rights: the right to buy new shares first, in proportion to your holding, when the company issues them. If the articles allow it, shares can also be allotted to third parties, so this is not always guaranteed.
Shareholders are liable for the company’s debts only up to what they paid for their shares (limited liability). So the most you can lose on a stock is your investment, while the upside has no fixed limit. This asymmetry is the basic nature of stocks as an asset. Buying with borrowed money (margin) or using derivatives breaks it — chapters 4 and 8 come back to this.
The four rights of a shareholder
Receive your share when the company distributes profit
On wind-up, share what is left after debts (last in line)
One vote per share at shareholders’ meetings
Buy new shares first in proportion to your stake
The payoff of a stock: losses stop at your investment, gains have no limit
Common and preferred shares, and voting rights
In Korea, a stock whose name ends in “우” is a preferred share. It usually has no voting rights but pays a slightly higher dividend than the common share (for example, an extra 1 percentage point of par value). Because it has no vote, its price can move differently from the common share in events such as control contests or mergers.
| Item | Common share | Preferred share (typical in Korea) |
|---|---|---|
| Voting | Yes (one vote per share) | Usually none |
| Dividend | As decided by the company | Often slightly more than common |
| Trading volume | High | Often low, so spreads are wide and prices can jump |
| Price | Reference | Often trades at a discount to the common share (preferred discount) |
In the US, founders often keep control through share classes with different voting rights (Class A, B, C and so on). When one company has two or more tickers, it is usually because of voting differences: the publicly traded shares have few or no votes, while the founders’ shares carry several votes each.
Share capital, capital surplus and share count
When a company issues shares, par value × shares issued is recorded as share capital, and anything received above that is recorded asshare premium (capital surplus). Issue a ₩500-par share for ₩10,000 and ₩500 goes to share capital and ₩9,500 to capital surplus. So par value or share capital alone tells you nothing about a company’s size.
This is where capital impairment comes in. When losses pile up and total equity falls below share capital, the capital is said to be impaired. For Korean listed companies, impairment beyond a certain ratio can lead to designation as an administrative issue or delisting. That is why loss-making companies sometimes rush into rights offerings or capital reductions without compensation (cutting the share count to reduce share capital) near year-end.
Market cap and enterprise value (EV) are different
Market capitalization is share price × shares outstanding — all of the company’s shares valued at today’s market price. But someone buying the whole company does not just buy the shares: they also take on its debt and get its cash. So the price from an acquirer’s view is theenterprise value (EV).
EV = market cap + net debt (borrowings − cash and equivalents) (+ adjustments such as minority interests)
Be careful with the share count used for market cap, too. Treasury shares the company has bought back are included in shares issued but carry no votes or dividends. So per-share value should use the count excluding treasury shares, and you should also look at the fully diluted share count, which adds shares that may be created later (convertible bonds, stock options).
Same market cap, different enterprise value
- Business value (EV)
- Cash (subtracted from EV)
- Net debt (added to EV)
Free float and index inclusion
Shares that actually trade — excluding those rarely sold, such as holdings of the largest shareholder, related parties and treasury shares — are called thefree float. Even with 100 million shares issued, if the largest shareholder holds 70%, only about 30 million shares trade in the market.
- Index inclusion: major indexes such as the KOSPI 200 and the S&P 500 weight stocks by market cap × free-float ratio. So a company with a small free float gets a smaller index weight for the same market cap.
- Supply and demand: stocks with a small free float move a lot on the same amount of buying or selling — especially when mechanical, large trades such as index additions or deletions cluster on a fixed date (chapter 12).
- Lock-up expiry: right after listing, existing shareholders’ shares are locked up for a period. When that period ends, the free float jumps. This is why people watch supply around lock-up dates for new listings.
Dilution: rights offerings, convertible bonds and stock compensation
When a company issues new shares, existing shareholders keep the same number of shares but the total rises, so their ownership percentage falls. This is dilution. Dilution is not bad in itself — if the new money creates more value than it costs, shareholders benefit. The problem is when it happens repeatedly, at low prices, without a clear use for the money.
| Method | What it is | What existing shareholders should check |
|---|---|---|
| Rights offering to shareholders | Existing shareholders get the right to buy new shares in proportion to their stake | If you do not take part, your stake shrinks. Sometimes the rights can be sold separately |
| Public offering / third-party allotment | New shares sold to the public or to specific parties | How far below market the issue price is (discount), and what the money will be used for |
| Convertible bonds (CB) | Bonds that can later be converted into shares at a set price (conversion price) | A clause lowering the conversion price when the stock falls (refixing) increases the number of new shares |
| Bonds with warrants (BW) | Bonds that come with the right to buy new shares | Like CBs, they increase the potential share count |
| Stock options and stock compensation | Shares or rights to buy shares given to employees | Large for US tech stocks, with a big effect on earnings (chapter 11) |
Your stake before and after a rights offering
- My 10 shares 10%
- Other 90 shares 90%
- My 10 shares 8.0%
- Other 90 shares 72%
- 25 new shares 20%
New shares created as the conversion price falls (₩10 billion of convertible bonds)
How splits, spin-offs and buybacks affect shareholders
Stock splits and bonus issues do not change value
If one share is split into five, the price falls to about a fifth and the market cap stays the same. A bonus issue likewise adjusts the price by the extra shares (ex-rights). Easier trading may raise demand, but the company itself is not worth more. When reading charts, check that you are looking atadjusted prices that reflect these changes before comparing with past prices.
Physical and personal spin-offs (Korea)
- Personal (pro-rata) spin-off: a division becomes a new company, and its shares are distributed to existing shareholders in proportion to their holdings. Shareholders end up owning both companies.
- Physical spin-off: the parent company owns 100% of the new company, and shareholders still hold only the parent. If the subsidiary is later listed separately, the value of the best business may be reflected less in the parent’s price (a so-called double-listing discount), which has been controversial in Korea.
Buybacks and cancellation
When a company buys back its own shares, the free float shrinks. But if the shares are held rather than cancelled, they can later be resold or used in mergers or exchanges, so the benefit to shareholders is limited. That is why, in a buyback announcement, it matters whether the shares will be cancelled.