How to Become a Shareholder in Public & Private Companies

Becoming a shareholder means owning a piece of a company. A shareholder is an individual or entity that owns one or more shares of stock, representing a claim on the company’s assets and earnings. This ownership can offer several benefits, including potential capital appreciation, dividends from company profits, and in some cases, voting rights. Understanding the pathways to acquire these shares is the first step toward company ownership.

Acquiring Shares in Publicly Traded Companies

Acquiring shares in publicly traded companies is the most common and accessible method for individuals to become shareholders. This process primarily occurs through a brokerage account, which acts as an intermediary for buying and selling securities.

Understanding Brokerage Accounts

Opening a brokerage account is the first step to engage in the public stock market. Investors can choose from full-service brokers offering financial advice, or discount and online brokers providing self-directed trading platforms with lower fees. The application process typically requires personal identification, such as a Social Security Number or other tax identification number, and details like your current address, employment information, and financial objectives. Brokerage firms also assess your investment experience and risk tolerance to ensure suitability for certain products.

Once the account application is approved, the account must be funded. This can be accomplished through various methods, including Automated Clearing House (ACH) transfers from a linked bank account, wire transfers, or by mailing a check. The time it takes for funds to become available for trading can range from 24 hours to approximately one week, depending on the funding method chosen.

Placing a Stock Order

With a funded brokerage account, you can place an order to buy shares. Most online brokerage platforms allow you to search for specific stocks using their ticker symbol, a unique abbreviation that identifies the company on the exchange. After selecting the desired stock, you will choose an order type to specify how your trade should be executed.

Two common order types are market orders and limit orders. A market order instructs the broker to buy or sell shares immediately at the best available current price. This order type prioritizes execution speed, ensuring the trade is completed, but does not guarantee a specific price due to potential price fluctuations.

Conversely, a limit order allows you to specify a maximum price you are willing to pay for a buy order or a minimum price you are willing to receive for a sell order. While a limit order guarantees the price if executed, there is no assurance that the order will be filled if the market price does not reach your specified limit. After placing an order, you will receive a confirmation once it has been executed, detailing the number of shares purchased and the executed price.

Acquiring Shares in Private Companies

Becoming a shareholder in private companies involves different avenues, as their shares are not readily available through traditional brokerage accounts. These methods often involve direct relationships with the company or its existing shareholders.

Employee Stock Plans

Many private companies offer employee stock plans as part of their compensation packages. Common types include Incentive Stock Options (ISOs), Non-Qualified Stock Options (NSOs), and Restricted Stock Units (RSUs). Understanding the terms of these grants is the first step.

ISOs and NSOs grant employees the right to purchase a specific number of company shares at a predetermined price, known as the strike or exercise price, after a vesting period. Vesting schedules typically dictate when these options become exercisable, often based on time or performance milestones. RSUs represent a promise from the company to deliver actual shares of stock to an employee once vesting conditions are met.

Exercising stock options involves paying the strike price to convert them into actual shares. This can sometimes be done through a “cashless exercise” where a portion of the shares are sold to cover the exercise cost. For RSUs, the conversion into shares usually happens automatically upon vesting, with the company typically withholding a portion of the shares to cover tax obligations. Exercising stock options or RSUs vesting generally has tax implications, as the value realized is often treated as ordinary income at the time of exercise or vesting.

Direct Investment in Private Companies

Direct investment in a private company typically involves purchasing shares directly from the company or from existing shareholders. A key step for this investment is conducting thorough due diligence. This involves researching the company’s financials, business model, management team, and legal structure to assess its viability and risks. Understanding the company’s valuation is also part of this preparation, as private company shares do not have a readily available market price. Legal counsel is often engaged to review company documents and draft or review the investment agreement.

This involves negotiating the investment terms and executing a formal legal agreement, such as a Stock Purchase Agreement. This agreement outlines the number of shares being purchased, the price per share, payment terms, and any conditions precedent to the transaction. Once the agreement is signed and funds are transferred, the company issues the shares to the new investor, completing the ownership transfer. Direct investments in private companies carry higher risks due to their illiquidity and often limited public information, making thorough preparation particularly important.

Other Avenues for Share Ownership

Beyond direct purchase or employee plans, individuals can become shareholders through other avenues. These methods often involve transfers of ownership rather than active acquisition.

Shares can be received as a gift from another individual. The process typically involves the giver initiating a transfer through their brokerage firm or a transfer agent, providing the recipient’s account information and personal details. Specific documentation like a stock transfer form may be required.

Similarly, shares can be inherited through an estate. When shares are part of a deceased person’s estate, an executor or trustee is responsible for facilitating the transfer of ownership to the designated beneficiaries. This usually involves providing the brokerage firm or transfer agent with a death certificate and relevant estate documents.

Some companies offer Direct Stock Purchase Plans (DSPPs) or Dividend Reinvestment Plans (DRIPs), allowing individuals to purchase shares directly from the company. DSPPs enable initial and ongoing purchases, while DRIPs allow existing shareholders to reinvest their cash dividends into additional shares or fractional shares of the company’s stock. These plans allow for accumulating shares over time, though they are less common than brokerage accounts for initial stock purchases.