Narcis Miclaus

6 min read

Personal finance, from zero Lesson 23 / 60

Stocks: what you actually own

Equity, voting rights, dividends, buybacks, and the accounting identity that anchors every decision about stock investing.

Sofia owns 10 shares of ENI. When she bought them, she handed over about €150. In exchange, she got… what, exactly?

Most retail investors can’t answer this precisely. “Shares.” “Part of the company.” “An investment that goes up and down.”

Today’s lesson is the precise answer. When you buy stocks you’re participating in a specific legal and financial relationship with the company, and understanding that relationship is the foundation of every later investing decision.

A stock is ownership

When you buy a share, you own a small slice of a real company. For every share you hold:

  • You have residual claim on the company’s assets after debts are paid.
  • You have voting rights at the annual shareholder meeting (assemblea).
  • You’re entitled to a share of dividends if the company distributes profits.
  • You benefit (or suffer) from changes in the company’s value.

Ownership can be tiny — Sofia’s 10 shares of ENI are roughly 0.0000001% of the company. But legally, it’s ownership, not a claim like a bond.

The accounting identity

Every company has a simple balance-sheet identity:

Assets = Liabilities + Equity
  • Assets: what the company owns (cash, inventory, buildings, intellectual property, receivables).
  • Liabilities: what the company owes (debt, accounts payable, pension obligations).
  • Equity: residual. Assets minus liabilities.

Stocks represent equity. When you own shares, you own a portion of assets minus liabilities.

Market capitalization = share price × total shares outstanding. Reflects what the market thinks equity is worth (not necessarily book value).

Important: equity is a residual. If the company’s liabilities exceed assets, equity is zero or negative — shareholders get nothing in bankruptcy. Bonds and senior debt have priority claims.

Dividends

Profits distributed to shareholders in cash (or occasionally stock).

  • Dividend yield: annual dividend / stock price. ENI dividend 2024 was about €1/share; at €15/share, yield = 6.7%.
  • Payout ratio: dividends / earnings. Companies paying 100%+ of earnings are likely unsustainable; 20-50% is typical for mature profitable companies.
  • Growing dividend: companies that raise dividends consistently are prized by income-oriented investors.

Not every company pays dividends. Tech companies often retain all profits for reinvestment (Google, Amazon historically). Mature industrial/utility companies typically distribute (ENEL, ENI, Snam, Terna).

Taxation of dividends in Italy: 26% withheld at source. Net dividend on €100 gross = €74.

Buybacks — another way of returning cash

An alternative to dividends: companies buy their own shares on the market and cancel them. Reduces share count, increases per-share metrics.

Effects:

  • Each remaining share represents a larger slice of the company.
  • Earnings per share (EPS) rises, even if total earnings didn’t.
  • No tax event for shareholders unless they sell.
  • Share price typically supported by the buying pressure.

US companies use buybacks heavily (60%+ of S&P 500 cash return via buybacks). European and Italian companies less so — dividends still dominant.

Tax advantage vs dividends in Italy: buybacks don’t trigger the 26% dividend tax. Gains only taxed when you sell. For long-term holders, buybacks are more tax-efficient than dividends.

Voting rights and the corporate democracy (such as it is)

Every annual meeting (assemblea), shareholders vote on:

  • Board of directors.
  • Executive compensation.
  • Major transactions.
  • Dividend approval.

For an individual retail shareholder, your vote is negligible (Sofia’s 10 ENI shares = 10 votes out of ~3.5 billion). But in aggregate, institutional investors (pension funds, sovereign funds) can meaningfully influence decisions.

In Italy, many listed companies still have significant controlling shareholders (families, state, foundations). This limits retail influence. FCA-Stellantis has the Agnelli family; ENI has the Italian state; Intesa has the Fondazione Cariplo. Minority shareholders have rights but not decision-making power.

Special share classes sometimes exist (actions with double voting rights in France for long-term holders, for example). Most Italian listed stocks have a single share class with one vote per share.

What drives stock prices

Short-term (days to months): noise, news, sentiment, fund flows. Mostly unpredictable.

Long-term (years to decades): the value of future cash flows the company will generate.

The math of long-term stock value:

  • Earnings per share (EPS) = net profit / shares outstanding.
  • Price / Earnings ratio (P/E) = market expectation of how much to pay for each euro of earnings.
  • Stock price = EPS × P/E.

Companies that grow earnings sustainably see their stock rise over time. Companies that don’t, don’t.

Italian market (FTSE MIB) P/E as of 2024: ~10-12. US S&P 500 P/E: ~22-25. Higher P/E reflects expectations of higher growth — Italian companies are more mature, less growth.

The three sources of stock returns

Over long periods:

  1. Dividends received. Part of total return.
  2. Buybacks reducing shares, supporting per-share price.
  3. Earnings growth compounding. Fundamental driver over decades.

Less important over long periods but dramatic short-term: 4. P/E multiple expansion/contraction. Market sentiment change.

For a long-term buy-and-hold investor, source 3 dominates. Pick companies (or more likely, indexes) where earnings grow sustainably.

How to value a stock

Simplified framework (not investment advice for individual stocks, just the mental model):

Discounted Cash Flow (DCF):

Stock value = sum of (future cash flows / (1 + discount rate)^year).

For a stable company with €5 EPS growing 3%/year, 10% discount rate:

  • Rough value = €5 / (10% − 3%) = €71 per share.

This is the simplest “Gordon growth model.” Real DCF is more elaborate but has the same shape.

When someone says a stock is “fairly valued” or “overvalued,” they implicitly reference some DCF. Different analysts reach different conclusions because the inputs (growth, discount rate) are estimates.

Retail investors rarely run DCF themselves. You rely on:

  • Market price as a rough “fair value” signal.
  • Aggregated analyst consensus (Yahoo Finance, Bloomberg).
  • Or, recommended: don’t pick individual stocks at all; invest in diversified indexes.

Picking stocks vs indexing

The big question: should you buy individual stocks or a diversified index ETF?

Data strongly favors indexing for most retail investors. Reasons covered in lessons 30 and 31:

  • Professional active managers underperform indexes over 10-year windows ~80%+ of the time (SPIVA data).
  • Retail investors do worse than pros.
  • Taxation and transaction costs eat into individual-stock returns.

Rule of thumb: for the bulk of your equity portfolio, own global index ETFs. If you want to dabble in individual stocks, limit it to 5-10% of your investable assets — essentially an entertainment budget that might yield some learning.

Italian home-bias problem

Italian retail investors famously overweight Italian stocks: 40-60% of equity portfolios in domestic names (ENI, Intesa, Unicredit, ENEL, Ferrari, Generali).

Italy represents about 0.7% of global equity market capitalization (source: MSCI). Holding 50% Italian stocks is 70× over-indexed.

Consequences of home bias:

  • Concentration risk. One country’s economy heavily overweighted.
  • Sectoral concentration. Italian market skews heavily to banking, energy, utilities, luxury. Less tech, less healthcare.
  • Currency risk neutrality. Italian stocks priced in EUR; EU-resident investor no FX gain. But nothing special.

Better: hold global diversified index. Italian market exposure will be ~0.7% — small but proportional. We’ll cover this in depth in lesson 35 (global vs home bias).

Specific Italian stocks worth knowing (not recommendations)

The FTSE MIB (40 largest Italian listed companies) is dominated by:

  • Financial: Intesa Sanpaolo, Unicredit, Generali, Mediobanca.
  • Energy: ENI, ENEL, Saipem, Snam, Terna.
  • Luxury/fashion: Ferrari, Moncler, Prada (listed HK).
  • Industrial: Leonardo, Prysmian, Pirelli, STMicroelectronics.
  • Telecom: Telecom Italia.
  • Healthcare: Diasorin, Recordati.
  • Auto: Stellantis, Ferrari.

The Italian market lacks major tech (outside STMicroelectronics, a semiconductor company) and healthcare giants (no equivalent of Novartis or GSK). Understanding this helps explain why Italian stocks have underperformed global indexes over the last 20 years — they’re concentrated in sectors that haven’t grown as fast as tech.

What to do with this lesson

Three habits:

  1. If you own individual stocks, compute what % of your portfolio is in single names. Over 5% in one company = concentration risk.
  2. Check your home-bias ratio. If over 20% of your equity is Italian, you’re likely over-concentrated.
  3. For new equity investments, default to global index ETFs. We cover specific choices in lesson 24 (rewrite).

Sources

  • Borsa Italiana — Listino FTSE MIB. https://www.borsaitaliana.it/.
  • MSCI — Country Classification Framework and weights. https://www.msci.com/country-classification (retrieved 2025-02).
  • SPIVA (S&P Dow Jones Indices) — SPIVA Europe Scorecard. https://www.spglobal.com/spdji/en/research-insights/spiva/.
  • Aswath Damodaran (NYU Stern) — Valuation. Ongoing online resource at https://pages.stern.nyu.edu/~adamodar/.

Next lesson: ETFs, UCITS, index funds — the instrument that makes diversified global investing trivial. (Rewrite of existing post with full course-voice treatment.)

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