What do you think of when you hear the words, “own a company”? For me, this means that I developed an idea, researched the need within the general market, confirmed the need, and then actually went through with the idea of starting my own company.
I now have an actual company, perhaps even with employees, and work every day in order to make a profit . This is definitely one way to own a company, but did you know there are many other methods of owning a company?
For many, though, owning a company comes in the form of simply owning stock in that company. You’re not a founder, just an owner (and usually a very small percentage owner). But owning stock isn’t the only way to own a company. There are alternatives to stock, which we break down here.
Purchase A Share Of Common Stock
This is the most common way to own a company. While it doesn’t feel much like ownership, you do in fact have ownership of the company and have rights to understand the company’s strategy and decision making. So how much of the company do you actually own by purchasing shares in the general stock market? Well, it all depends on how many shares you buy. If a company has issued 100,000 shares and you own 100, you essentially own 0.1% of the company.
Become an Angel Investor
A pimple-faced kid walked around the neighborhood, asking friends and acquaintances if they’d like to invest in his company. He spoke some geeky gibberish about software and user interfaces, but it didn’t make much sense to you, so you politely turned him down and closed the door. Little did you know that this opportunity could have made you millions. That kid that was just at your door was Bill Gates! Just think, what if you were able to provide him some start-up capital in exchange for 10% ownership of the company? What would that be worth today? At Microsoft’s peak, it was worth over $600 billion. You, as a 10% owner could currently be worth $60 billion. Not too shabby huh?
Well this is obviously easier said than done. First of all, you have to have some serious money stashed away, and second, you need to have some connections to the newest up-and-comers (because chances are that these opportunities aren’t just going to fall into your lap). If you truly do find some talent that shows some promise, don’t be afraid to invest. Sure, you might lose everything, but you also might find the next Bill Gates.
There are new ways to become an angel investor that are just becoming popular. Right now, you can crowd fund real estate investments through two different platforms: RealtyMogul and FundRise. Both of these companies have low minimums to get in on what were previously exclusive investments.
Buy Preferred Shares
Buying preferred shares is yet another way to own a portion of a company. Those that purchase preferred shares often think of their investment as they would if they owned common shares. However, in the event of a liquidation, those that have preferred shares will be the first to receive any kind of payment (if there is any money left). This is an obvious advantage, but it also comes with its disadvantages, such as having to give up your voting rights.
Alternatives To Stock: Buy Stock Options
Instead of just buying shares the old fashioned way (through common or preferred shares), you could purchase stock options, which, quite obviously by the name, gives you the option to buy the stock. But, how exactly does this work? There are many different types of options, but for the sake of this example, let’s use a call option. If a stock price is currently $40 and you believe that it’s going to increase in value and rise to $50 per share, you’d buy a call option. If, in fact, the stock price does rise to $50, you now have the option to purchase the share for $40 and could effectively turn around and sell it (if you wanted) for $50. But, if you felt like the price would continue to rise, you could keep it and own a portion of the company for a little longer. A lot of people look to boost their returns by buying stock options.
Buy a Stock Warrant
Many of you may not have ever heard of a stock warrant, but they are almost the exact same thing as an option. Using the example from above, if you thought a stock price was going to rise from $40 to $50, you could buy a warrant that would allow you to buy your shares after the stock price had risen. You’d pay the $40 after the stock went up and own the shares for $50. But, here’s the real difference. Rather than purchasing the shares from another investor, you would actually receive the shares from the actual company. Typically, a company does this if they’re looking to increase their cash reserves. Since they directly offer the shares to you, the investor, the money that is used to make the purchase goes directly back to them.
So What’s Your Choice?
I currently own my own business, meaning I actually started a business from scratch. Let me tell you that it is a ton of work! But, I have total control over all of my operations. If I want to sit back and do a little less work this month, I have that option. Sure, I make less money, but I don’t have any investors to worry about because I’m not incorporated (yet). On the other hand, since my business is completely my own, I have the ability to ramp up my efforts as well and hopefully make some additional money. With greater control though, comes more responsibility.
Many people like to have a little less influence on their business. For instance, some people really like the idea of investing in real estate, but do they go out and buy a quad-plex and rent out each room personally? Most likely no. What do they do instead? They invest in real estate in the market! They can diversify their investments more effectively and they have far less responsibility, while still capitalizing on the growth of that market sector.
So what is your choice? Do you prefer to start an actual company on your own? Or do you like the idea of a more hands-off approach? If you’d rather invest your money in the hands-off approach, then which of the choice above would you most prefer? Any reason why you’d choose one over the other?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.