A shareholder is an individual or an institution that owns shares in a public or a private corporation and, therefore, are legal owners of the company. The percentage of their ownership depends on the number of shares they hold against the total number of shares made available by the company.
They may be ordinary or preferred and vary in rights depending on their type. Their influence and power in daily operations also depend on the percentage of their holdings. However, since they are not legally the same as the entity, they are not liable for the company’s debts. Shareholders get the stocks from the primary or secondary market and trade in them.
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- Shareholders are people or organizations with a legal or financial claim over the company’s assets. Shareholders can be divided into two categories: common shareholders and preferred stakeholders.
- Moreover, additional shareholder classification could be done on a class basis, including Class A, Class B, Class C, etc.
- The security representing a financial claim or ownership of the company’s assets is sometimes called common stock. The preferred stock can be considered the corporation’s asset ownership security.
- Conversion features that may be encoded in preferred stockholders are typically activated whenever a management change is approaching, turning them into poison pills.
The law defines the shareholder only after their name. Or the entity’s name (in the case of the institution) mentioned in the company’s register. Company shareholders or of the corporation are legally separate from the corporation itself and thus are not liable for its liability. Until and unless they’ve offered a guarantee, they have limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies. to the unpaid share price underlying.
They can acquire shares from the primary marketsPrimary MarketsThe primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer. (during the company’s IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.) and thus provide the capital for the corporation or from the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.. They are considered to be the subset of stakeholders of the company. There are certain rights of shareholders who have a direct or indirect interest in the business entity, like customers, suppliers, employees, and the community.
Here we discuss the roles and rights of shareholders in details.
- Discuss, decide, and vote for the directors of the company.
- Decide on the directors’ salary. This has to be appropriate to compensate for the expenses and cost of living in the city where the director lives without being able to compensate for the company’s offers.
- Taking decisions in areas where directors have no power, including making changes at the company constitution level;
- They were checking and approvals of the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. as of and when they are reporting as per company Act norms.
- Company shareholders decide on the dividend pay-out percentage and ensure the dividends are paid out.
- Brainstorm, vote, and decide on any organizational decision (strategy, merger, acquisition, liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order. etc..)
There are two types of shareholders.
#1 – Common
A person or an institution that owns common shares or ordinary shares of a companyOrdinary Shares Of A CompanyOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company. is known as a common shareholder.
#2 – Preferred
Preference shareholders are the persons or institutions that own a “preferred share” of a company is, known as a “preferred shareholder.” Regarding liability from a company’s perspective, the preferred sharesPreferred SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation. are seniors to common shares and juniors to debt and bonds.
Both common and preference shareholders get paid the agreed dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. from the company on the decided date. The “preferred” gets payment before the common shareholders and after the company pays all its debt holders and vendorsVendorsA vendor refers to an individual or an entity that sells products and services to businesses or consumers. It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers..
Following are the six rights that shareholders get by their nature:
- Voting Power: It has the right to vote for the corporate decisions concerned and limited to the company.
- Partial Ownership of Firm: They own part of the company proportional to the number of shares in the holder’s name.
- Right to Transfer Ownership: It has the right to transfer its shares to any person or institution under certain conditions.
- Right to Receive Dividends: They are entitled to receive the decided amount, as shareholders dividends, in the company’s AGM (Annual General Body Meeting). The dividend is for the shares they own.
- Right to Inspect Corporate Documents: Under the company’s activities, a firm is liable to report and file its financials. Everyone inspects any of these corporate documents on any occasion without any particular reason.
- Right to Sue Concerned for Wrongful Acts: They can file a lawsuit if they come across any wrongful action by the company. Wrongful action could be in terms of ethics, discrimination, fraud, etc.
- They have the right to vote and elect the director of the firm. These directors, in turn, appoint and supervise senior executives and officers, including CFOsCFOsThe full form of CFO is Chief Financial Executive, and he or she is a top level executive of the firm who is responsible for the firm's overall finance functions and has the authority to make financial decisions for the organization. , COO, and CEOCEOChief Executive Officer is the full form of CEO. He is the most senior member of a corporate organization, an executive who oversees the whole administration and operations of the company and reports directly to the board of directors and chairman, with the sole purpose of generating wealth for the company's stakeholders and shareholders. . Thus they influence the firm’s operations director. Thus, they indirectly influence the share price of a stock in a market. It can trade its shares in share markets for money and pledge to raise money. The supply and demand of any particular company’s shares in the market define, fluctuate and decide the share price.
- They invest the money as capital in the company and expect returns when the company makes profits, so they are one of the company’s or corporation’s important stakeholders. If a company liquidates, creditors are first in line to receive their debts. Next comes the bondholders who hold bonds of the company. Common shareholders are next and last in line to have their debts paid in case of the company’s liquidation. They are the most important stakeholder and participate in the company’s management.
- Volatility: The price at which a stock trades in the market can fluctuate. Thus shareholders have to bear the risk of volatility.
- Dividends: There is no fixed shareholders dividends percentage or compulsion for the companies to pay them.
- Financial Performance: Shareholders’ returns are solely decided by profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance. and financial performance.
- Bankruptcy: They are last in line to receive their debt if a company goes bankrupt and files for liquidation.
Shareholder Vs Stakeholder
- All Shareholders are no doubt the stakeholders, in fact, vital stakeholders of that particular company. However, the reverse is not true (vendors, customers, and employees are not shareholders).
- Stakeholders are not owners of the company, but shareholders are the owners of the company. The number of shares decides their percentage of ownership.
- Stakeholders do not have voting rights.
- Stakeholders don’t get dividends. Whereas shareholders get dividends as decided in the general body meetings.
- Shareholders are last in line to receive liability when the company files for bankruptcy. Whereas stakeholders receive their debt as per their rank in order (Employees, vendors, creditors, and bonds holders)
Frequently Asked Questions (FAQs)
Companies typically name the two classes of stock they provide as Class A and Class B, with Class A shares having higher voting rights than Class B shares. It is because class B shares only grant one voting right per share, whereas class A shares may grant ten.
Common stock is divided into classes, with Class A shares often having more voting rights than Class B shares. Conventional Class A shares cannot be traded by the holders or sold to the general public.
The primary responsibility of shareholders is to vote in their role as shareholders at general meetings to pass resolutions. This obligation is crucial because it allows the shareholders to exert complete control over the business and its management.
This has been a guide to Shareholder and its meaning. We explain its differences between stakeholders, their rights, role, types, importance & limitations. You may learn more about financing from the following articles –