What are Shareholder Types?
Shareholder are individuals or an organization that have residual claim or financial claim over the assets of the business and can be bifurcated into two broad types namely the common shareholders and preferred stakeholders. Further classification of shareholders could be performed on class basis such as Class A, Class B and Class C etc.
Top 2 Types of Shareholders
On a broader level, the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. can be classified as preferred stockholders and common shareholders.
#1 – Common Shareholders
- The common stockholders are shareholders that generally hold common stock issued by the business and are entitled to dividends that are declared by the business at regular intervals.
- The common shareholders generally have voting rights to nominate board membersBoard MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company's policies, dividend payouts, top-level managers' recruitment or layoff and executive compensation. of their choice to the company’s board or management. If the business makes a huge profit, then common shareholders may earn dividends at a higher rate, which could be more than the fixed rate of dividends earned by the preferred stockholders. They are always in the majority, whereas preference shareholders are few in numbers wherein the common shareholders additionally hold the right to sue the business in the event of any potential wrongdoing as exhibited by the business.
- The common stock can be termed as the security that represents financial claim or ownership towards the assets held by the business. The preferred stock can be termed as the security that describes the ownership of the assets held by the business. However, the priority of claim over the business assets is generally ranked higher over the common stock.
#2 – Preferred Shareholders
- The preferred shareholders are termed as the second type of shareholders. They are regarded as owners as well as investors, but they generally enjoy preferential status over the common stockholders as bestowed by the business. They generally hold preferred stock, which is nothing but hybrid securityHybrid SecurityHybrid securities are the combined characteristics of two or more types of securities, usually both debt and equity components. These securities allow companies and banks to borrow money from investors and facilitate a different mechanism from the bonds or stock offering. displaying features of both equity and debt.
- They are entitled to dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. at a prescribed fixed rate similar to the interest component of debt. They get dividends whether or not the business makes a profit for the given financial year or not. The common stockholders receive dividends if the business has made some profits for a given financial year.
- In the event of liquidation of the business, the preference stockholders normally have the first right to the business assets after the debt holders but before the common equity holders. However, the preferred stockholders generally don’t hold any voting rights that are utilized for the appointment of the board of directors.
- The preference stock can be regarded as senior claims, and common stocks can be regarded as junior claims. The issuance of preference shares generally provides protective provisions that prevent the company from creating preference shares that are senior to the existing issues. Therefore, when business underperforms, the common stockholders do not get any dividends, and they have to bear the maximum risk.
- The preference shareholders get their dividend payments on time whether the business outperforms or under-performs, and they generally don’t bear that level of risks that are borne by the common shareholders, and they generally hold a secured position with respect to the business.
- In terms of the cost of issuing common equity and preferred equity, the common equity is cheaper and viable financing options as compared to the preferred equity option. The quality of common stocks is not rated by the credit rating agencies, whereas the preferred equity is always rated by the credit rating agencies. The company or business generally issues preferred equity in order to prevent hostile takeovers.
- The preferred stockholders may have conversion features embedded in it, which are generally exercised whenever there is an imminent change in the management, and hence, they transform as poison pillsPoison PillsPoison pill is a psychologically based defensive strategy that protects minority shareholders from an unprecedented takeover or hostile management change by increasing the cost of acquisition to a very high level and creating disincentives if a takeover or management changes happen in order to alter the decision maker’s mind.. The common stock generally does not have such features in place. The users of the preferred stocks maybe venture capitalists who may have initially funded the business with seed or start-up capital and generally have interests to retain preferential status in the business.
The business normally has two types of shareholders. They can be classified as preferred stockholders and common stockholders. The common stockholders are large in the count, whereas preferred stockholders are few in the count.
This has been a guide to Shareholder Types and its definition. Here we discuss the top 2 types of shareholders along with a detailed explanation. You may refer to the following articles to learn more about finance –