Definition of shareholder


What is a shareholder?

A shareholder, also known as a shareholder, is a person, company or institution that owns at least one share of a company, known as capital stock. Since the shareholders are essentially the owners of the business, they reap the benefits of the success of a business. These rewards come in the form of higher stock valuations or as financial gains distributed as dividends.

In contrast, when a company loses money, the price of shares invariably falls, which can cause shareholders to lose money or suffer a decline in their portfolios.

Key takeaways

  • A shareholder is any person, company or institution that owns shares in the shares of a company.
  • A shareholder of a company can have only one share.
  • Shareholders are subject to capital gains (or losses) and / or dividend payments as residual claimants on a company’s earnings.
  • Shareholders also enjoy certain rights, such as voting at shareholders’ meetings to approve board members, dividend distributions, or mergers.
  • In the event of bankruptcy, shareholders can lose up to their entire investment.

Understand the shareholder

A single shareholder who owns and controls more than 50% of the outstanding shares of a company is a majority shareholder. By comparison, those who own less than 50% of a company’s shares are classified as minority shareholders.

In many cases, the controlling shareholders are company founders and, in older companies, the controlling shareholders are usually descendants of the company founders. In any event, by controlling more than half of a company’s voting share, controlling shareholders wield considerable power to influence critical operational decisions, including the replacement of board members and C-level executives such as executive directors (CEOs) and other senior personnel. For this reason, companies often try to avoid having majority shareholders among their ranks.

Also, unlike sole proprietorships or partnerships, corporate shareholders are not personally liable for the debts and other financial obligations of the business. Therefore, if a company becomes insolvent, its creditors cannot target a shareholder’s personal assets.

Important

Shareholders have the right to collect the income that remains after a company liquidates its assets. However, creditors, bondholders, and preferred shareholders take precedence over common shareholders, who may be left with nothing after paying off all debts.

According to the statutes and bylaws of a corporation, shareholders traditionally enjoy the following rights:

  • The right to inspect the books and records of the company.
  • Power to sue the corporation for misdeeds of its directors and / or officers.
  • The right to vote on key corporate matters, such as appointing the directors of the board and deciding whether or not to give the green light to potential mergers.
  • The right to receive dividends
  • The right to attend annual meetings, either in person or via conference call.
  • The right to vote on critical issues by proxy, either through mail-in ballots or online voting platforms, if they are unable to attend voting meetings in person.
  • The right to claim a proportionate allocation of income if a company liquidates its assets.

It is a common myth that corporations must maximize shareholder value. While this may be the goal of the management or directors of a company, it is not a legal duty.

Common shareholders vs. preferred shareholders

Many companies issue two types of shares: common and preferred. The vast majority of shareholders are ordinary shareholders, mainly because ordinary shares are cheaper and more abundant than preferred shares. While common shareholders enjoy voting rights, preferred shareholders generally do not have voting rights due to their preferred status, allowing them to earn dividends before common shareholders are paid. Additionally, dividends paid to preferred shareholders are generally more significant than those paid to common shareholders.

What are the two types of shareholders?

A majority shareholder who owns and controls more than 50% of the outstanding shares of a company. These types of shareholders are usually the founders of companies or their descendants. Minority shareholders own less than 50% of the shares of a company, even just one share.

What are some of the key shareholder rights?

Shareholders have the right to inspect the company’s books and records, the power to sue the corporation for misdeeds of its directors and / or officers, the right to vote on critical corporate matters, such as appointing board directors. In addition, they have the right to decide whether or not to green light potential mergers, the right to receive dividends, the right to attend annual meetings, the right to vote on crucial matters by proxy, and the right to claim a proportionate allocation of income. . if a company liquidates its assets.

What is the difference between preferred shareholders and ordinary shareholders?

The main difference between preferred shareholders and ordinary shareholders is that the former does not have the right to vote, while the latter does. However, preferred shareholders have priority over a company’s income, which means that they are paid dividends before common shareholders. Common shareholders are last in line with respect to company assets, which means they will be paid after creditors, bondholders, and preferred shareholders.

www.investopedia.com

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Mark Holland

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