A 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 legal owners of the company and the percentage of their ownership depends on the number of shares they hold against the total number of shares made available by the company.
The law defines the shareholder only after their name. Or the entity’s name (in case of institution) mentioned in the company’s register. Shareholders of a company or the corporation are legally separate from the corporation itself and thus are not liable for the corporation’s 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 either 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 IPOIPOInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes. of the company) and thus provide the capital for the corporation or from the secondary market. They are considered to be the subset of stakeholders of the company, which has a direct or indirect interest in the business entity like customers, suppliers, employees, and the community.
Roles of Shareholder
- Discuss, decide, and vote for the directors of the company.
- Decide on the directors’ salary. This has to be appropriate in order 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;
- Checking and making approvals of the financial statements of the company as and when they are reporting as per company Act norms.
- Deciding on the dividend pay-out percentage and make sure 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. and etc..)
Types of Shareholders
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
A person or an institution that owns a “preferred share” of a company is known as a “preferred shareholder.” In terms of liability from a company’s perspective, the preferred shares are seniors to common shares and juniors to debt and bonds.
Both common and preferred get paid the agreed 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. from the company on the decided date. The “preferred” get payment before the common shareholders and after the company pays all of its debt holders and vendors.
Rights of Shareholder
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 name of the holder.
- Right to Transfer Ownership: It has the right to transfer his shares to any person or institution under certain conditions.
- Right to Receive Dividends: They have the right and entitled to receive the decided amount, as a dividend, 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 inspect 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 and etc.
Importance of Shareholder
- 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 CEO. Thus they influence the firm’s operations director. It can trade the shares they hold in share markets for money, pledge to raise money. The supply and demand of any particular company’s shares in the market define, fluctuate and decide it’s the share price. Thus, they indirectly influence the share price of a stock in a market.
- They invest the money as capital in the company and expect returns when the company makes profits, so they are one of the important stakeholders of the company or corporation. 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 management of the company.
Difference between Shareholder and Stakeholder
- All Shareholder is no doubt the stakeholder’s, 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 company files for bankruptcy. Whereas, stakeholders receive their debt as per their rank in order (Employees, vendors, creditors and bonds holders)
- Volatility: The price at which a stock trades in the market can be fluctuating. Thus shareholders have to bear the risk of volatility.
- Dividends: There is no fixed dividend percentage or compulsion for the companies to pay the dividends.
- Financial Performance: Shareholder’s 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 its financial performance.
- Bankruptcy: They are last in line to receive their debt in case if a company goes bankrupt and files for liquidation.
This has been a guide to what is Shareholder and its definition. Here we discuss types and rights of shareholders along with roles and importance. You may learn more about financing from the following articles –