Shareholders benefit twice over when a business is doing well: they get dividends as their part of the company’s profits, and the value of the shares goes up so that when they sell they get capital appreciation as well. The return on shares over the long term has been substantially better than inflation or the growth in pay and notably better than most other homes for savings. According to data from Credit Suisse, Global Financial Data and Thomson Datastream, the return on US shares between 1904 and 2004 was very nearly 10 per cent per annum, and 8.5 per cent on UK shares.

If the company fails to make a profit shareholders usually get nothing, though some companies try to keep them happy and loyal by dipping into reserves to pay a dividend even at a time of loss. In any case, if the company goes bust they are at the back of the queue for getting paid. On the other hand, one of the reasons a business is incorporated (rather than being a partnership, say) is that the owners, the shareholders, can­not lose more money than they used to buy the shares. That is in sharp contrast to a partnership, where each partner has unlimited personal liability – they are liable for the debts of the business right down to their last cuff-links or to their last earrings. So even if an incorporated com­pany goes spectacularly broke owing millions of pounds, the creditors cannot come knocking on the shareholders’ door.

Source: Becket Michael (2014), How the Stock Market Works: A Beginner’s Guide to Investment, Kogan Page; Fifth edition.

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