Which of the following investments gives the investor part ownership of a corporation

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The amount of control an investor exerts over their invested companies

What is the Significance of Investor Influence?

The level of investor influence a company holds in an investment transaction determines the method of accounting for said private investment. The accounting for the investment varies with the level of control the investor possesses.

What are the Varying Levels of Control?

An investor can hold majority ownership or minority interest in a company they own or have invested in. If they hold a minority interest, this control can be further divided into two levels – the investor either has minority active or minority passive control.

#1 Majority ownership

Majority ownership exists when an investor holds more than 50% of a company’s shares. This gives the investor effective control of the company. Investments in this company are then accounted for using the consolidation method. Note that having exactly 50% of a company’s shares does not necessarily mean effective control for an investor, as another investor holding the other 50% would result in a split.

#2 Minority – active

A minority active interest exists when the investor holds 20-50% of the company’s shares. This gives the investor the ability to influence management decisions, but not to control them entirely. Investments of this type are accounted for using the equity method.

#3 Minority – passive

Finally, a minority passive ownership interest exists when the investor holds less than 20% of the company’s shares. This gives them no significant influence over the company. Investments in this company are accounted for using the cost method or the market method and may be classified as public or marketable securities.

Ownership Guidelines

It is important to note that the classifications above are simply guidelines to classify the degree of influence an investor possesses over a company.

In reality, there may be circumstances where these guidelines don’t apply. For example, if an investor owns less than 20% of a company but holds significant influence in it, then they may use the equity method to account for their investments in said company.

In another example, if an investor owns a 51% share in a company, but does not exercise effective control over it, then they may not use the consolidation method to account for their investments.

Additional Resources

See the following resources from CFI to learn more about equity investing and accounting.

• Private equity
• Investment methods
• Public securities
• Consolidation method
• Equity method
• Cost method

In investing, the terms "stock," "share," and "stake" are often used interchangeably, but it's important for all investors to realize that each term has its own distinct meaning.

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First let's look at stocks versus shares since these are the two terms that are most commonly confused, especially by newer investors. The main difference between a stock and a share is that stock is a broader concept to convey ownership in a company, while shares are the individual units of ownership.

The words "stock" and "share" are often used interchangeably, but there are key differences between the two.

Stocks are securities that represent ownership in a corporation. When an investor buys a company's stock, that person is not lending the company money but is buying a percentage of ownership in that company. In exchange for purchasing stocks in a given company, stockholders have a claim on part of its earnings and assets. Some stocks pay quarterly or annual dividends, which are a portion of the issuing company's earnings.

An individual unit of stock is known as a share. For example, if you were to say, "I own stock in Apple (NASDAQ:AAPL)," it tells us that you are invested in Apple stock and therefore own a small portion of the equity in the company. On the other hand, if you say, "I own 100 shares of Apple," it conveys the exact number of ownership units you have. 

The key takeaway is that shares give information about an investment size, while the term "stock" does not by itself. An investor who buys a single share of Apple and Warren Buffett, whose company owns more than one billion shares of the tech giant, can both be accurately described as "owning stock" in Apple, although the size of their investments are very different.

Learn more about how many shares you should buy of a stock

What is a "stake?"

A stake is often used to describe the amount of stock an investor owns, and this is certainly a correct way to use the word. If you own stock in a given company, your stake represents the percentage of its stock that you own.

However, a stake doesn't necessarily need to refer to stock ownership. Rather, "stake" is a more general term used to convey partial ownership in a company. As an example, if you and a business partner decide to buy an investment property together, you could say that you both own a stake in the property even though there's no formal stock structure. In addition, bondholders are considered stakeholders in a company because they stand to benefit if the company performs well.

Additionally, if you invest in a smaller, non-public company, you might receive a stake in the business in exchange for your investment. Let's say a company is looking to raise $50,000 in exchange for a 20% stake in its business. Investing $50,000 in that company could entitle you to 20% of that business's profits going forward.

Related investing topics

Stockholders, shareholders, and stakeholders

Those who own stocks in a public company may be referred to as stockholders, stakeholders, and shareholders, and. in reality, all three terms are correct.

Of these terms, stockholders and shareholders are essentially interchangeable in all situations. Both refer to investors who own shares of stock in a company. On the other hand, as you can probably infer from the previous section, stakeholder is a bit more general since it doesn't have to refer to stock ownership and simply means that the individual or entity has some form of financial interest in a business.

Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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