Definition and Examples of Shareholders
Individual shareholders, organizations, and even other companies are people who own shares in a company and are thus partial owners of the business. Companies contribute to gather capital for the business. Individuals can purchase shares to earn returns through dividends and capital appreciation. Shareholders can own either common or preferred shares, and shareholders are different from bondholders and stakeholders.
Definition and Examples of Shareholders
Shares represent a partial ownership stake in the company. Since a shareholder owns one or more shares in a company, they are considered a partial owner of the company.
The company can issue shares through an initial public offering (IPO) because it wants to transition from a private company to a public company, raise funds for expansion, develop new products and services, or pay off debts. The public can purchase these shares through a brokerage firm.
Once you become a shareholder, you have rights to the company’s profits and assets, as well as the right to vote on certain management decisions. For example, in May 2021, shareholders of Chevron Corporation voted in favor of a proposal to reduce emissions from its products.
Types of Shareholders
To understand the types of shareholders, you should start by looking at the two main types of shares a company may issue: common shares and preferred shares. When we talk about shareholders, we usually refer to those who own common shares versus preferred shares.
A common shareholder is known as the “residual claimant,” meaning they are the last to receive income generated by the company through dividends after creditors, such as banks, bondholders, and preferred shareholders. Creditors and preferred shareholders receive a fixed payment from the company, so common shareholders can benefit if the company generates large profits. If the company does not generate enough cash to pay creditors and preferred shareholders, common shareholders receive nothing. In contrast, preferred shareholders receive fixed dividends and typically do not have any right to additional earnings. Preferred shareholders also have voting rights in the company.
Shareholders vs. Bondholders vs. Stakeholders
Shareholders differ from bondholders and stakeholders.
Shareholders hold rights in the company and receive dividends and capital gains on their shares only if the company succeeds and generates sufficient income. Bonds are debt agreements, and bondholders are the lenders. They receive fixed interest payments from the company until their bonds mature.
Stakeholders constitute a broad group that includes anyone affected by the business (employees, investors, etc.). Although stakeholders include creditors and shareholders, they do not necessarily provide capital to the company and may not receive payments like shareholders and bondholders.
Advantages and Disadvantages of Being a Shareholder
Advantages
- Opportunity to increase capital
- Opportunity for dividends
- Limited liability
Disadvantages
- The stock value may decline
- No guarantee that the company will pay dividends
How to Become a Shareholder
To become a shareholder, you just need to buy one or more shares in a company. You can do this through an app or website or the physical location of a brokerage firm. Make sure to conduct the necessary research and due diligence first. If you buy stocks, ensure they are suitable for you and consider your investment risk tolerance and objectives and how the company measures those factors.
Source: https://www.thebalancemoney.com/what-is-a-shareholder-5187208
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