Shareholder: Definition & Types
When you invest in a company, you become a shareholder and partner. As a shareholder, you have ownership responsibilities and rights for the company. You also have financial interests in a company.
If the company does well, your stock might increase in value. Conversely, if it does poorly, it will decrease in value. But why would anyone invest their money in a business that isn’t profitable?
Because partnering with a public corporation and becoming a shareholder is beneficial in several ways—especially if your risk tolerance is high.
The benefits of being an investor include gaining deferred tax liability, qualifying for potential future incentives from the company (such as insider access to pre-IPO shares), and profiting from upside potential of shares depending on performance of the business.
Let’s take a look at what being a shareholder means and how it benefits you as an investor.
Table of Contents
- A shareholder is someone or something that owns shares of a company’s stock.
- Shareholders have the right to vote on company matters, receive dividends, and be paid out in the event of a company liquidation.
- Any person or entity can be a shareholder, including individuals, trusts, companies, and superannuation funds.
What Is a Shareholder?
A shareholder is a person, business, or organization that holds at least one share of stock in a firm or mutual fund.
An individual shareholder owns shares of a company. This can be done through buying stock in a public company or through purchasing shares in a private company.
When an individual shareholder owns shares of a company, they become a part owner of that company and have financial interests in a company.
Shareholders, or stockholders, are individuals who purchase shares in a company or venture via the stock market. Before the company goes public, these are the people who are providing the company with the initial capital that they will use to start up the company.
Once the company has gone public and shares are offered for sale to the general public, a person can then purchase outstanding shares in a company.
The Rights of Shareholders
There are a number of rights that shareholders enjoy, depending on the type of business. Right to Receive an Annual Report: The company must provide shareholders with a report at least once a year. Ideally, this report should be filed with the Securities and Exchange Commission.
This report provides an overview of the company’s financial standing.
Right to Vote at Shareholder Meetings: Each company has a specific time period, usually a few weeks, when shareholders can vote on certain matters.
Right to Be Informed about Major Corporate Events: The company must inform shareholders about anything major that is impacting their business. This can include important things like the death of a key employee or the purchase of another company.
Right to Receive Dividends: If the company pays a dividend, you will receive a portion of the profit generated by the company.
Types of Shareholders
There are two major types of shareholders: preferred shareholders and common shareholders.
Preferred Shareholders: Preferred shareholders are individuals or corporations who purchase shares in a company that gives them a priority on any profits earned. Preferred shareholders get their profits before the common shareholders. Preferred shareholders are usually compensated with higher dividends and earn interest.
Common Shareholders: Common shareholders are individuals or corporations who do not receive preference on profits earned. Common shareholders receive profits after preferred shareholders get paid. Common shareholders are not compensated with higher dividends or interest.
What Are the Main Types of Shareholders?
Insider Shareholders: Insider shareholders are individuals who are employed by the company and own shares in a company. Commonly, executives and employees of the company will get a portion of their compensation in the form of shares in a company.
Non-Insider Shareholders: Non-insider shareholders are individuals who do not currently work for the company but own shares in a company.
Venture Capitalist Shareholders: Venture capitalists are people or organizations who invest in a company by buying shares in it. They usually do this in exchange for partial ownership of a company and possibly partial control of management decisions.
What are the Benefits of Being a Shareholder?
Potential Tax Benefits: Oftentimes, individuals will invest in a business with a loss to offset their current income. You could also buy shares in a particularly promising company who will likely see their value increase in the near future.
Access to Information: As a shareholder, you have access to the company’s financial information. This information can provide you with a better understanding of how the company operates and help you make informed investment decisions.
Potential Profit from an Increase in Shares: If you own shares of a company, you have the potential to profit from an increase in the value of the shares.
What are the Disadvantages of Being a Shareholder?
Potential Loss if the Business Fails: If the company you invest in fails, you could lose all or a portion of your investment. There is always risk involved when investing, but you can use your knowledge of the company and its industry to mitigate some of that risk.
Potentially Large Amount of Time to Receive Payment: The company has to generate enough revenue to pay you dividends. This could take several years, and in some cases, decades.
Lack of Control: As a shareholder, you have no control over the day-to-day operations of the company. The board directors and the executive committee are responsible for corporate governance.
Board leadership has limits to its reach within an organization. The largest shareholder might have some influence over company decisions. But the overall ability of shareholders only goes so far.
What is an Example of a Shareholder?
Let’s say you invest $5,000 in Company XYZ and purchase 100 shares at $50 per share. This means you have invested $5,000 in a company and have an ownership interest in 10% of the company.
Each year, Company XYZ pays a dividend of $700 ($7 per share). You would receive $100 ($1 per share) as the owner of 10% of the company. If the share price is $100 in five years, the shares would be worth $10,000.
You would then sell the shares and receive $10,000 – $5,000 = $5,000 as a profit. Alternatively, you could choose to hold onto the shares until they are worth $100 each. In this scenario, you would receive $100,000 as a profit.
Being a shareholder in a company means you own a small part of the company. You have financial interests in a company and could receive dividends from their profits.
Shareholders also have certain rights including receiving information from the company and voting in shareholder meetings. The rights and benefits of being a shareholder depend on the type of company you invest in.
FAQs About Shareholder
Who can be a shareholder?
Any person or entity can be a shareholder. This includes individuals, trusts, companies and superannuation funds.
What rights do shareholders have?
Shareholders have the right to vote on company matters, receive dividends and be paid out in the event of a company liquidation.
What is a share?
A share is a unit of ownership of a company. Shares give the shareholder certain rights, including the right to vote on company matters and to receive dividends.
What is a shareholder vs stakeholder?
A shareholder is someone or something that owns shares in a company. For instance, a majority shareholder owns the most shares in a company.
A stakeholder is a person or entity with an interest in the success or failure of a company. Stakeholders can be shareholders, but they can also be employees, customers, suppliers, or creditors.
Do shareholders get paid?
Shareholders are paid dividends out of a company’s profits. They may also receive payments in the event of a company liquidation.
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