What Is a Shareholder?
A shareholder, also referred to as a stockholder, is any person, company, or institution that owns at least one share of a company’s stock (equity). Because shareholders are a company's owners, they reap the benefits of the company's successes in the form of increased stock valuation or profits distributed as dividends. If the company does poorly and the price of its stock declines, however, shareholders can lose money.
In the case of a bankruptcy, shareholders can lose up to their entire investment.
The Basics of Shareholders
Unlike the owners of sole proprietorships or partnerships, corporate shareholders are not personally liable for the company's debts and other financial obligations - they are protected by limited liability. If the company becomes insolvent, its creditors cannot demand payment from shareholders' personal assets.
Although they are partial and residual owners of the company, shareholders do not manage a firm's operations. An appointed board of directors governs the company's activities and operations. through professional managers such as the CEO.
A single shareholder that owns and controls more than 50 percent of a company's outstanding shares is known as a majority shareholder. Otherwise they are minority shareholders. A majority shareholder is often the founder of the company or, in the case of long-established businesses may be the descendants of the founder. By controlling more than half the voting interest, the majority shareholder is a key stakeholder and influencer in the business operations and strategic direction of the company. Their powers may include replacing a corporation’s officers or board of directors. A majority shareholder is more common in private companies than public companies, and not all companies have a majority shareholder.
- A shareholder, also referred to as a stockholder, is any person, company, or institution that owns at least one share of a company’s stock.
- As equity owners, shareholders are subject to capital gains (or losses) and/or dividend payments as residual claimants on a firm's profits.
- Shareholders also enjoy certain rights such as voting at shareholder meetings to approve things like board of directors members, dividend distributions, or mergers.
Shareholders enjoy certain rights, which are defined in the corporation's charter and bylaws and will often include:
- To inspect the company's books and records
- To sue the corporation for misdeeds of the directors and officers
- To vote on major corporate matters, such as who sits on the board of directors and whether a proposed merger should occur
- To receive a portion of any dividends the company declares
- To attend, in person or via conference call, the corporation's annual meeting to learn about the company's performance
- To vote by proxy through the mail or online when not attending a voting meeting
- To receive a proportionate allocation of the proceeds if a company liquidates its assets (however, creditors, bondholders, and preferred stockholders have precedence over common stockholders)
The specific rights allocated to both common and preferred shareholders are outlined in each company's corporate governance policy.
It is a common myth that corporations are required to maximize shareholder value. While this may be the goal of a firm's management or directors, it is not a legal duty.
Common vs. Preferred Shareholders
Many companies elect to issue two types of stock: common and preferred. Most shareholders are common stockholders primarily because common stock is less expensive and more plentiful than preferred stock. Common stock is generally more volatile and more likely to generate profits compared to preferred stock, but common stock holders have voting rights.
Preferred stockholders generally have no voting rights because of their preferred status. They receive fixed dividends, generally larger than those paid to common stockholders, and their dividends are paid before common shareholders. These benefits make preferred shares a more useful investment tool for those primarily looking to generate annual investment income and in many ways cast preferred shareholders as creditors rather than outright equity investors.