What is a Common Shareholder?

A common shareholder is an individual, business, or institution that holds common shares in a company, giving the holder an ownership stake in the company. This will also give the holder the right to vote on corporate issues such as board elections and corporate policy, along with the right to any common dividend payments.

How Being a Common Shareholder Works

A person or other entity becomes a common shareholder by buying at least one share of common stock of a company. That party is now a fractional owner of the company as long as they hold onto at least one share.

Common shareholders participate in the price movements in the stock which is based on how investors view the future outlook of the company and upon the company's performance. If the price of the stock moves higher after purchase, this results in a profit for the buyer by way of a capital gain.

Common shareholders may also receive dividend payments from the company, which is a cash or stock payout. Not all companies pay dividends, but if a common dividend is declared all common shareholders are entitled to it and the cash or shares will automatically appear in the common shareholders trading account on the payment date.

Since common shareholders are fractional owners of the company, they also get to vote on corporate affairs.

In the case of bankruptcy, common shareholders are typically the last to receive anything from liquidation. First, the company pays out all debtholders. If there is anything remaining after that, then preferred shareholders are paid, followed by common shareholders. Commons shares may also come in classes such as Class A or B, with each level having different voting rights and dividend rights.

Common shareholders might also be granted preemptive rights, which would let them buy additional shares, for instance in a secondary offering, before they are made available for public purchase on the markets.

Key Takeaways

  • A common shareholder is someone who has purchased at least one common share of a company.
  • Common shareholders have a right to vote on corporate issues and are entitled to declared common dividends.
  • Common shareholders are paid out last in the event of bankruptcy after debtholders and preferred shareholders. In exchange, common shareholders have the opportunity for capital gains.

How the Rights of Common Shareholders Can Affect a Company

There are a variety of rights that common shareholders possess regarding the direction and major decisions of a company. The voting powers of these shareholders allow them to contribute to the choices made by the company regarding actions such as how to address offers of acquisition from other entities or individuals. They might also have a hand in voting on the composition of the board of directors who are intended to represent the interest of shareholders when the company makes strategic plans.

While individual shareholders tend to own only a small fraction of the overall shares of a company—especially compared with majority shareholders—they can collectively present a considerable voting segment. Such activity, if many shareholders are persuaded to take joint action, can be the acting force in proxy fights for control of a company.

Shareholders also have rights regarding access to the records of the company. This gives them a measure of control to enforce accountability on the part of management. If there is an act of wrongdoing by officers or directors of the company that negatively affects the company's shares or overall market value, common shareholders can pursue a derivative suit on behalf of all shareholders against the parties believed to be doing harm to the company.

If a particular group of shareholders believes the company’s leadership has mismanaged operations or otherwise done harm to the organization’s worth and standing, the group might file a class action lawsuit to seek damages for themselves. This may include how the company’s management handled bids to acquire the business as well as growth strategies.

Example of a Common Shareholder

For example, a person could become a common shareholder of The Allstate Corporation (ALL) by buying at least one common share of the stock. Assume the stock price is $95. The investor buys how many shares they want, multiplied by $95. They are now a common shareholder.

Being a common shareholder means they own shares that will fluctuate up and down in value, presenting the opportunity for capital gains or losses if the price of the shares rise or fall from the purchase price.

The investor also gets to vote on corporate matters, attaining one vote for each share they own.

The common shareholder also receives a dividend. As of May 2019, Allstate paid a $0.50 per quarter dividend, or $2 per year on each share owned.

Allstate also has debtholders and preferred shareholders. If the company were to go into bankruptcy, common shareholders would be paid any remaining funds after all the debt holders and preferred shareholders were paid.