Stock, sometimes called a share or a share of stock, represents an equity interest in a corporation. A company issues stock to investors in exchange for contributions by the investors.

Understanding Stock and Ownership

Stockholders are sometimes referred to as the owners of the company. This is metaphorical at best. Owning shares in Chipotle doesn't give you the right to enter Chipotle's kitchen or help yourself to free guac. What it means is that you have some claim on the residual assets of the company. By residual, we mean the assets that remain after all other creditors have been paid, as noted in the section on priority above. Once you contribute money to the corporation, it belongs to the corporation and can only be withdrawn at the authorization of the corporation.

Let's test drive some of these concepts. 

7.1.3.1 I form a corporation, The Bucket, Inc. In exchange for $100 The Bucket issues me 1 share.  Who owns the $100 in The Bucket? How can I get the $100?

7.1.3.2. The Bucket has no other assets. What's a rough value of one share of The Bucket? How much would you be willing to pay for one share?

7.1.3.3 Suppose instead The Bucket had issued me 10 shares for my $100 contribution. How much would you pay for all 10 shares? How much would you pay for just 1 share? If you have 1 share, how would you get that value? What if I hold the other 9 shares and I disagree? Would that affect the value of your share?

Accretion, Dilution and Par Value

The questions above should give you some intuition that the value of a share is, quite roughly, the value of the company's assets divided by the number of shares outstanding. (For this section, we'll ignore the challenges and costs of other shareholders blocking your ability to get the assets.)

Let's assume Best Bikes has store inventory worth $770,000 and $30,000 in cash. Assume for simplicity that it has no debt. The company would be worth $800,000 ($770,000 + $30,000 = $800,000). Assume there are three shares outstanding. Ignoring the effects of control, each share would be worth, roughly, $266,666.

Let's mess with the top half of the equation by adjusting the company's assets.

Now, assume we have a profitable quarter and increase our cash by $100,000, after replacing inventory. The company is now worth $900,000 ($800,000 + $100,000 = $900,000). Each share of stock is worth $300,000.

Suppose instead that someone breaks in and steals $70,000 worth of inventory. The company is now worth $630,000 ($800,000 - $70,000 = $630,000), and each share of stock is worth $210,000 ($630,000 / 3).

Now let's mess with the bottom half of the equation by adjusting the number of shares.

Returning to our original example, suppose we have $800,000 in assets and 3 shares outstanding, meaning each share is worth roughly $266,666. Suppose an investor offers to purchase a share for $100,000. If we accept, the company's assets are $900,000, and there are 4 shares outstanding so each share is worth $225,000. Notice that the value of the company went up, but the value of a share went down. Dilution is when the value of an equity interest decreases because the company has issued more equity interests.

We can also go the other way. Suppose instead that the investor offered to purchase 1 share for $400,000. The total value of the company would then be $1,200,000, with four shares outstanding for a rough value of $300,000 per share. Accretion is when the value of an equity increases because of growth in the corporation's assets.

So the price at which you sell a share can affect the value of the shares. Last century, investors worried that the corporation would sell stock too cheaply and devalue their stock. To prevent this they relied on the concept of par value. Par value is the minimum value at which a corporation can sell a share of stock. The corporation could (and typically would) sell stock for more than par value, but never less. Par value is set in the certificate of incorporation, so it cannot be changed without the shareholders' approval.

Par value also ensured that the corporation was sufficiently capitalized to pay its creditors. The idea is that by setting some minimum amount for each share sale, the corporation would be more likely to be able to pay its creditors.

Over time, par value fell out of favor. Sometimes a company needs money desperately, and a dilutive transaction may be the only way to keep it afloat. Par value became a trap for the unwary more than a protection against dilution or a source of value for potential creditors. Most new corporations set par value at a penny or less. For example, at the time of writing Meta Platforms, Inc., which runs Facebook, sets its par value at $0.000006 per share. Both the MBCA and Delaware permit corporations to eliminate par value altogether. MBCA 2.02(b)(2)(iv); DGCL 151.

Classes of Stock

The certificate of incorporation may designate different classes of stock. For example, a young corporation may have only common stock. A growing corporation may have common stock and Class A preferred stock. A mature, non-public company may have common stock, Class A preferred stock, Class B preferred stock and Class C preferred stock.

These "class" designators refer to preferred stock, and they are custom to each corporation; Class A stock at one company could be very different from Class A stock at another company. That's because the rights of preferred stock are negotiated when the stock is issued, so the rights will vary depending on the bargaining power and preferences of the parties. This also means that the Class A preferred stock will have different rights than the Class B preferred. Each class is separately negotiated when the stock is authorized.

Companies usually label their preferred stock alphabetically by when the stock is issued (Class A is issued first, then Class B, etc.), but there's no legal requirement to do so. But following that convention makes it easier for investors to quickly understand your capital structure.

Common stock does not have designators, it is not negotiated, and it is the default stock with rights defined by the statutes and caselaw.