By Matija Šerić
Stocks (also known as shares or equities) have become so commonplace that we often take them for granted. We hear about them in the news, in casual conversations at cafés, in political speeches and analytical reports – as if they have always been an integral part of our world. Yet behind this seemingly “ordinary” term lies one of the key pillars of the modern economy. Although stocks may look simple at first glance, they are actually a complex and multilayered concept. In the broadest sense, they are securities issued by a joint-stock company that represent a portion of its share capital. By owning a stock, the shareholder becomes a member of the company, together with the rights – and obligations – that arise from this membership. This is why the word “stock” is used in three simultaneous meanings: a stock is a share of capital, the totality of membership rights and obligations, and the security itself. It may be a small piece of paper or just a number on a screen – but it carries enormous economic significance.
The Concept of a Stock
The term “stock” is used when defining the concept of a joint-stock company, whose share capital is divided into stocks. A stock must be paid for with some form of consideration in order to create or increase the company’s share capital. Joint-stock companies issue stocks as a way of raising the necessary financial resources. In return, the shareholder acquires a stock along with the rights and obligations established by law and by the company’s statute. Stocks are classified as long-term securities and are considered to have the most developed secondary market. An important characteristic of stocks is that they are permanent (lasting) securities. Their permanence is defined by their indefinite duration; a stock remains valid for as long as the company that issued it exists.
Stocks explained
Shareholder Powers
A stock represents a set of rights and obligations linked to membership in a joint-stock company. Shareholder powers can be divided into two basic groups: property rights and management rights. Property rights include the right to a share of profit and the right to the remainder of assets after the company’s liquidation. Management rights include voting rights, the right to receive information, supervisory rights, and others. A shareholder acquires membership rights even without the issuance of a physical stock certificate; even if certificates are expected but not yet issued, membership rights still apply.
Stock as Part of Share Capital
A stock represents a portion of the company’s share capital and expresses the membership of its holder, along with the associated rights and obligations. In principle, a company is not legally required to issue stock certificates. If certificates are issued, they may be bearer or registered stocks. The company’s statute determines whether stocks are bearer or registered with regard to their transferability. Bearer stocks do not indicate the identity of the holder and can be transferred by simple delivery, whereas registered stocks indicate the holder’s name and are transferred by endorsement.
Stocks must be registered when issued before full payment of their nominal value or when paid in installments. The statute may also require company approval for the transfer of registered stocks – a concept known as “vinculation.” Registered stocks are recorded in a special stock ledger. Typically, companies issue physical certificates only when dealing with bearer stocks.
Shareholder Liability
There are several reasons why joint-stock companies raise capital through stock issuance. This approach makes companies more public and transparent, which enhances their reputation and makes future fundraising easier. Stocks are also easily transferable, which simplifies inheritance processes. One of the main reasons for the easy transferability of stocks is that shareholders are liable for the company’s obligations only up to the amount of their investment. This is the principle of limited liability.
Types of Stocks
Equity securities can be classified according to several criteria. One criterion is the order in which stocks are issued. Stocks may be founders’ shares or new issues. Both serve as important capital-raising methods in Anglo-American legal systems, and increasingly in transition economies such as Croatia. Funds raised this way appear on the asset side of the balance sheet as permanent assets, while the liability side shows increased share capital.
Based on the rights they carry, stocks may be ordinary or preferred. Another criterion is voting rights. Stocks may carry no voting rights, one vote per share, or multiple votes.
A stock certificate consists of three parts: the main certificate (the “sheet”), the talon, and coupons. These are the essential components. The main certificate is the official confirmation of membership in the company and must contain specific mandatory elements, such as the type of stock, its nominal value, the company name, registered office, whether the stock is bearer or registered, the issuance date, and authorised signatures.
The Stock Certificate (Plašt dionice)
If the certificate lacks mandatory elements, it is not invalid, but the shareholder may refuse to accept it and request corrections. If the shareholder accepts it, they bear the risks regarding proof of their rights. Those involved in issuing such incomplete certificates are liable for damages. Optional elements may be added, such as priority rights for dividend payments.
Coupon Sheet
The coupon sheet confirms membership and the right to dividends when attached to the main certificate. Detached coupons may become independent securities. Each coupon contains a serial number, stock number, company name, and authorised signature facsimiles. Coupons cease to be valid once the main certificate expires.
Talon
The talon is a document granting the right to receive a new coupon sheet once the previous one is used up or lost. It is not a security but a legitimising document that must contain the stock number. It can only be transferred together with the stock certificate.
Stock Issuance
Due to its importance, the decision to issue stocks may be made only by the founders at incorporation or by the general assembly. This authority cannot be delegated. Today, due to technological advances and high printing costs, many companies issue stocks in dematerialised form if permitted by the statute.
Ordinary and Preferred Stocks
Ordinary stocks grant voting rights, dividend rights, and rights to liquidation proceeds. Preferred stocks grant priority rights, such as dividend priority or priority in liquidation, but may require additional contributions from shareholders. Preferred stocks may exist only if ordinary stocks also exist.
Plural Voting (Pluralni volotum)
Preferred stocks may carry multiple votes per share in some countries, but this is prohibited in Croatia. Croatian law forbids issuing stocks that confer different voting rights for the same nominal value.
A cumulative preferred stock grants the right to unpaid dividends before ordinary shareholders receive theirs. A participating preferred stock allows its holder to receive a fixed preferred dividend plus participate in dividends allocated to ordinary shareholders.
The Power of Stocks
There are also non-voting stocks (often called Class A stocks), which grant economic rights but no voting power. Other forms include employee stocks, dividend stocks, principal stocks, internal stocks, convertible stocks, and fully paid stocks.
Stocks are undoubtedly a vital element of corporate governance, as ownership structure forms a fundamental part of the modern economy. In capitalism, those who hold power and influence truly hold everything.
