What Is a Stock, Really? (The Story of Boniface, Part 2)

When we last left Boniface and Mercy, they had just agreed on a business deal. Mercy and the other members of her investment club would give Boniface $10,000 for the purpose of opening a new shop in a promising location near a new textile factory.

In return, Boniface would give the club a 10% ownership stake in his business, SmileSave Supermarkets. You can read Part 1 of the story here.

Let’s see how the venture fared since then.

Growth Accelerates

Boniface wasted no time in deploying the injection of capital from the investment club. He hired builders and purchased cinder block, concrete, and corrugated iron the very next day. Within two months he had a tidy little road-side store.

The new location performed extremely well, just as Boniface had forecast. Customers filled the shop thanks to its fair prices and the variety of goods it had for sale. And, just like at the other SmileSave Supermarkets, Boniface’s employees greeted every customer warmly as they entered the store.

A Disagreement Over Dividends

Soon, the day arrived for Boniface to deliver SmileSave’s first quarterly financial report to the teachers’ investment club. He was nervous as he put on his jacket and tie. He hoped that Mercy and the others would be pleased with their investment.

Boniface and the teachers gathered in an empty classroom after the students had been dismissed. He greeted them all warmly and proceeded to detail SmileSave’s activities over the preceding three months. He told them its sales figures. Its expenses. Its assets. And its profits.

When Boniface announced that SmileSave had earned $4,000 during the quarter, Isaac, the science teacher jumped from his seat with glee.

Photo by Nchenga

Photo by Nchenga

“This is fantastic!” he exclaimed. “We will recoup our $10,000 investment in no time!”

Mercy, the math teacher, turned in her seat to face him, “But, Isaac, remember that we own just 10% of SmileSave. Boniface owns the other 90%. So, our portion of the earnings is $400 – not $4,000.”

Isaac slowly sat back down in his chair. “Hmm… $400 for the investment club. And there are 10 of us who are members of the club. That means each of us receives just $40.” The other teachers murmured.

“Not exactly,” said Boniface nervously as he cleared his throat, “SmileSave must keep most of these profits in order to grow, so I am proposing a dividend of $1000 – not $4000.”

The room fell into a stunned silence.

“But Boniface,” said Grace, the English teacher, “That means each of us in the investment club will receive a dividend of just $10.”

Boniface looked at the floor. Before he could respond, Mercy came to his rescue.

“Listen, everyone,” she said, “We knew this was not a loan. This is an investment. If we demand that all profits be returned to us in the form of dividends, SmileSave will remain small. It’s like having a flock of chickens and eating every egg that the hens lay. But if you allow some eggs to hatch, they will grow into roosters and hens, and your flock will grow.”

The other teachers looked unconvinced.

“Let me explain how I intend to grow the business,” said Boniface, “With the $3,000 of retained profits, I will begin to purchase materials to construct SmileSave Supermarket #5. I would also like to begin installing television in the shops, so that people can relax and watch English Premier league football or soap operas while eating fish and chips and drinking cold beverages.”

There was silence in the room, as the teachers considered the plan.

“Hmm… I do like fish and chips,” said Isaac as he rubbed his round belly.

“And I love to watch Manchester United,” said Grace.

“All in favor of approving the dividend?” asked Mercy.

Every teacher raised a hand.

Building the Business

As the years passed, SmileSave grew and grew. Boniface built one new store per year. Then two. Then three. He hired more employees. He bought more trucks. He even constructed a refrigerated warehouse to store his goods.

And quarter after quarter, Boniface raised the shareholders’ dividend in line with SmileSave’s growing profitability. The investment club was delighted with the performance and there was rarely any more disagreement about the size of dividends.

As the business expanded, he realized he needed more good advisors like Mercy. So, Boniface formed a Board of Directors which included an accountant, a lawyer, a banker, and (of course) Mercy.

Going Public

Word of SmileSave spread throughout the region, and every week, it seemed, someone asked Boniface how they might invest in the business, too. Just like the teachers did years before.

Meanwhile, Isaac, the science teacher was nearing retirement age. He asked Boniface if it might be possible for him to sell his stake in SmileSave so that he and his wife could build a house closer to his grandchildren.

Boniface brought both of these questions to SmileSave’s next Board of Directors meeting.

“We could simply arrange for Isaac to sell his stake to any new interested investors,” said the lawyer.

The banker and accountant nodded their heads in agreement, but Mercy just sat in her chair, munching on Weetabix, and deep in thought.

“Boniface,” she said suddenly, “are the shops selling a lot of fish and chips?”

“Indeed they are!” he replied. “It’s actually becoming a problem, because people are standing, eating fish and chips in the store while watching soap operas. The shops become very crowded. Other customers bump into them while they try to shop. But how does this pertain to this meeting’s agenda?”

Mercy looked around the table. “I think it is time for SmileSave to list on the stock exchange,” she said.

“An IPO??” asked Boniface incredulously.

Ignoring him, Mercy turned to the accountant. “How much is SmileSave worth?” she inquired.

“Roughly $500,000,” he replied.

“Good. I propose that we raise an additional $250,000 by offering shares of SmileSave to the stock market. We can use the additional funds to build fish and chips restaurants at each supermarket.”

“That’s an interesting idea,” said the lawyer. “It will allow people to easily invest in the company while allowing investors like Isaac to sell their stake.”

“Plus, the extra funds for investment in restaurants will help SmileSave grow even more quickly,” said the banker.

“After the IPO, SmileSave will be worth $750,000,” said the accountant, “We can specify that this be divided into 750,000 shares of $1.00 per piece.”

“Will I still own a majority of the company?” asked Boniface cautiously.

“Yes,” Mercy replied. “You presently own 90% of SmileSave, while the teachers’ investment club owns 10%. To determine the value of your stake, just multiply $500,000 by 90%. That’s $450,000.”

“After the IPO, the shareholding structure will look like this,” said the accountant.

  • Boniface: 450,000 shares (60% of total)
  • Teachers’ Investment Club: 50,000 shares (7% of total)
  • New public shareholders: 250,000 shares (33% of total)
  • Total: 750,000 shares (100%)

Just as he did years before, Boniface rubbed his chin. “I like this proposal, Mercy. We have ourselves a deal.”

And with that, the Board began preparations for listing on the stock market. At the Initial Public Offering (IPO), hundreds of new investors scrambled to secure shares (or stock) in the fast-growing business. Each of them now owned a little piece of each shop, truck, television, warehouse, and, most importantly profits.

And that is how SmileSave Supermarkets became a stock.

Now It’s Your Turn

After reading the story of Boniface, what questions do you have about stocks and stock markets? Let us know in the comments!

 

Comments

  1. Hi, got some question here: even shareholders are investing their own funding, there is still possibility that dividends are not going to be paid at all. Who decide on that (Boniface? as he got more than 51% of total shares?)

    • Great question, Piotr. You’ve hit on one of the most crucial concerns of a stock investor. In a public company, the dividend is officially set by the Board of Directors. And, yes, they may recommend that a dividend not be paid at all. This is often the case of small companies who need to retain all of the profits in order to grow the business.

      If a company has a majority shareholder (like Boniface), this shareholder exerts a huge amount of influence on the dividend. Small investors have little influence on this decision. So, small investors should take note of the ownership structure of a company and also its history of paying dividends when deciding whether to invest.

  2. Ryan – this is an excellent story to teach about what a stock really is. It is so simple, clear and real life. I was caught up in the story while learning. Thank you once again for sharing your wisdom. You are a blessing :)

    Tessa

  3. Itumeleng says:

    Ryan,

    You’re a beast, this is the simplest illustration for the stock market. Great one.

    Itumeleng

  4. I like your smile. Thanks for that story, its very informative. I want to learn the basics first before I venture into investing. I’ll be glad to tutored.

    • Thanks for the feedback, Jegede. I’m trying to smile more. Did you know smiling is good for your heart?

      Wise to build up your knowledge before investing your hard-earned money. I’ll try to explain some more introductory investing concepts in coming months.

      Good to have you here!

  5. You are a blessing! I have learnt from this, in fact I will share this on my investments Facebook group, you can have a look at it too and help us learn more! here is the address : https://www.facebook.com/groups/thesmartinvestors/ I am an economists student trying to wrap my head around the whole investments affair.
    Thanks a bunch!

  6. What an interesting piece! I have never been glued to an article safe this. I love the logic in it, thanks to the author. The concept of shares seems difficult to comprehend, but after a piece like this it is becomes elementary. My very classmate Eunice shared this great piece with me; ton Eunice ” thanks friend” After Boniface it is me. Regards!

  7. I know this is a year old but it is still blessing people. Wow this is an amazing story that helped me understand instantly! I love that it is a happy story. Please add a part 3 and 4 and… Maybe you can do something with one of Mercy’s students learning puts/calls/options, maybe Weetibix sponsor World Cup and sales on a special edition wrapper soar! :) Just a thought. Thank you for taking the time for this!

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