What is a 'Shareholder'
A shareholder is any person, company or other institution that owns at least one share of a company’s stock. Because shareholders are a company's owners, they reap the benefits of the company's successes in the form of increased stock valuation. If the company does poorly, however, shareholders can lose money if the price of its stock declines.
BREAKING DOWN 'Shareholder'Unlike the owners of sole proprietorships or partnerships, corporate shareholders are not personally liable for the company's debts and other financial obligations. This means that if the company goes under, its creditors cannot demand payment from shareholders like they could from the owners of privately held entities.
Also unlike the leadership of other business types, companies with shareholders rely on a board of directors and executive management to run things — meaning the actual owners, the shareholders, don't have much say in the day-to-day operation of the business.
A shareholder may also be referred to as a stockholder.
Though they are not involved in most decisions, shareholders do have rights, which are defined in the corporation's charter and bylaws. Shareholders have a right to inspect the company's books and records or sue the corporation for misdeeds of the directors and officers, for example. Common shareholders are also entitled to vote on major corporate matters, such as who sits on the board of directors and whether a proposed merger should go through. Most importantly, in the event that a company liquidates its assets as a result of bankruptcy or dissolution, its shareholders have a right to a proportionate allocation of the proceeds. However, creditors, bondholders and preferred stockholders have precedence over common stockholders in a liquidation. Shareholders also have a right to receive a portion of any dividends the company declares.
Shareholders also have the right to attend the corporation's annual meeting to learn about the company's performance, or listen to the meeting via conference call. Common shareholders who cannot or do not wish to attend a meeting to vote on a given matter have the right to vote by proxy through the mail or online. The specific rights allocated to both common and preferred shareholders are outlined in each company's corporate governance policy.
Common vs. Preferred Shareholders
Many companies elect to issue two types of stock: common and preferred. Because common stock tends to be cheaper and more plentiful than preferred stock, most shareholders own this type of stock, meaning they can vote on company issues and receive dividends only when the board of directors deems it a suitable use of company funds.
While preferred shareholders do not enjoy the same voting rights as common shareholders, preferred shares typically pay a larger dividend than their common counterparts. In addition, preferred share dividends are guaranteed and must be paid each year prior to any dividends being issued to common shareholders, making preferred shares a more useful investment tool for those primarily looking to generate annual investment income.