What Is a Shareholder?

Shareholders, also called “shareholders,” are people, organizations, and even other companies that own shares in a company and are therefore partial owners of a business. Since shareholders are partial owners of a company, the purpose of any business is to create shareholder value.

Learn what shareholders are, the different types of shareholders, and how shareholders differ from creditors and stakeholders.

Definition and examples of shareholders

Shares represent a fractional ownership interest in a company. As a shareholder owns one or more shares of a company, a shareholder is a partial owner of the company.

A company may offer shares through an initial public offering (IPO) because it wants to transition from a private company to a public company, raise money for expansion, develop new products and services, or pay off debts. The public can buy these shares through a broker.

Once you become a shareholder, you have the right to the profits and assets of the company, and the right to vote on certain management decisions.

For example, in May 2021, Chevron Corporation shareholders voted to approve a proposal to reduce emissions from the use of their products.1

Shareholders can propose and elect members to the board of directors.

Types of shareholders

To understand the types of shareholders that exist, you need to start with the two main types of shares that a company can issue: common and preferred.

When we talk about shareholders, we generally refer to those who own ordinary shares versus preferred shares.

A common shareholder is known as a "residual claimant," which means they are last in line behind creditors such as banks, bondholders, and preferred shareholders to receive the income the company generates through dividends. .

Lenders and preferred shareholders receive a fixed payment from the corporation so that common shareholders can benefit if the company generates a significant profit.

If the company does not generate enough cash flow to pay creditors and preferred shareholders, common shareholders receive nothing.

Preferred shareholders, on the other hand, receive a fixed dividend and are generally not entitled to additional earnings. Preferred shareholders also have no corporate voting rights.

Shareholders vs security holders vs stakeholders

Shareholders are different from bondholders and stakeholders.

Shareholders own the capital stock of the company and only receive dividends and capital appreciation for their shares if the business is doing well and generating sufficient income.

Bonds are debt agreements and bondholders are creditors. They receive fixed interest payments from the corporation until their bonds mature and are repaid.

Stakeholders are a broad group that includes anyone who may be affected by the business (employees, investors, etc.).

Although stakeholders include creditors and shareholders, they do not necessarily provide capital for the business and may not be paid as shareholders and bondholders.

Pros and cons of being a shareholder

There are many reasons to buy stocks and become a shareholder, but it is not without risk.

Pros

Capital appreciation potential

Dividend potential

limited liability

Cons

The price of a share can go down

There is no guarantee that the company will pay dividends.

 

We hope you enjoy watching this video about What Is a Shareholder?

Source: MBN

 

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