What Does It Mean To Be a Shareholder?

The role of the shareholder is one of the bedrock concepts that form the foundation of investment. Even if you’re just starting out on your investing journey, you’ve likely heard the term. But you may be wondering: just what is a shareholder, and what does it mean to be one?

What is a shareholder? Simply put, a shareholder is any individual who owns stock in a given company. You can become a shareholder in a company simply by investing in it through the purchase of its stock. But it’s important to understand the nuances of what a shareholder is before you invest. That includes all the types, rights, responsibilities, and risks that relate to this role.

• Types of shareholders
• What it means to be a shareholder
• Pros and cons of being a shareholder
• How to become a shareholder

Types of shareholders

Though the basic definition is straightforward, there are several distinct types of shareholder, and the category into which you fall affects the rights you have as an investor.  In general, these categories are separated by the type and amount of stock you own. 

In terms of amount, majority shareholders are those who own 50% or more of a company’s stock, while minority shareholders possess less than 50%. Fractional shareholders who own less than one full share of stock in a company may, in certain jurisdictions, be entitled to limited rights relative to those who own one or more complete shares.

Another way to categorize shareholders is by the type of stock owned; this is the categorization that’s relevant to most everyday investors. 

• Common shareholders are those who own common stock and typically represent the vast majority of a company’s shareholder body. Common stockholders can buy and sell their shares on a stock exchange, and they receive the right to vote on company matters. If the company pays dividends, common shareholders receive amounts that correspond to the company’s share price when such payouts are made, but they receive those payments after preferred shareholders.
• Preferred shareholders own preferred stock, which is a type of equity security that shares characteristics of both common stocks and bonds. While preferred stocks are traded on exchanges, the market for them can be small because many companies do not issue this type of stock. Preferred shareholders receive dividends in fixed amounts in perpetuity, providing a source of steady income Preferred shares may be redeemed, or bought back by the company, at certain times, whereas common stock is owned by the shareholder and may not be redeemed. Preferred shareholders do not have corporate voting rights, but are paid before common shareholders when dividends are paid out and when assets are distributed following a liquidation. 

What it means to be a shareholder

Owning shares of a company’s stock represents more than just the potential to profit or lose capital as a result of its changing valuation. When you invest in a company’s stock, you essentially become one of many co-owners. And just like owning a home, a vehicle, or anything else, that ownership is accompanied by certain rights and responsibilities.

Shareholder rights

By law, shareholders are entitled to several protections and privileges. These rights help protect investors, reduce fraud, inform sound decision making, and support a competitive economic landscape. Though the specifics of these rights vary from state to state, they generally include the following:

• Ownership: As mentioned above, stock ownership is equivalent to corporate ownership. The portion of a company owned by a given shareholder is expressed as a percentage equivalent to the number of shares owned, divided by the number of a company’s outstanding shares. A majority shareholder, or shareholder who owns more than 50% of a company’s available stock, is said to have a controlling interest in said company. In other words, such a shareholder owns a large enough portion of the company that they are able to leverage their voting power to make unilateral decisions about its direction.
• Voting rights: The ability to vote on issues related to a company’s business decisions is arguably the most important action shareholders are granted by law. Shareholders can vote on matters such as the election of the company’s board of directors, mergers and acquisitions, and changes to a company’s charter. Through these decisions, shareholders have agency over the direction of a company and can express their satisfaction or dissatisfaction with its leadership. In most cases, a shareholder gets a number of votes equivalent to the number of shares they own, so a larger investment translates to more voting power. This is how majority shareholders are able to exercise their control interests. Legally, shareholders are entitled to vote by proxy if they prefer to cast their votes remotely or are unable to do so in person.
• Right to transfer ownership: Shareholders have the right to sell their stock when they see fit, and the company has no ability to prevent or interfere with this action.
• Dividends: When a company’s value grows, it has three options for what to do with its newly acquired profits: reinvest into the company, pay profits out to shareholders as dividends, or a combination of the two. As such, dividends represent a way for companies to build trust and morale with shareholders, which is why some choose to pay out dividends even when they haven’t recently made a profit. As a shareholder, dividend payments can be a way to receive additional financial benefit from your investment beyond a potential increase in stock value.
• Right to inspect corporate documents: Shareholders fall into a special space between the company’s management and the general public when it comes to the ability to review a company’s documents, as the right to inspect the minutes of board meetings, the company charter, and other basic records are protected by law. However, shareholders are not privy to all of a company’s documents. For example, shareholders can’t freely inspect a company’s books; their only legally enshrined window into a company’s financial specifics comes in the form of quarterly financial disclosure reports. Corporate documents can help you ascertain important indicators of a company’s performance, such as stockholders’ equity.
• Right to sue for wrongful acts: Shareholders retain the right to sue a company in which they have invested for a number of reasons. In general, shareholders may be motivated to sue when they perceive that a company or its management has deceived or misled them, mismanaged the company’s finances, or denied them one or more of the other rights discussed on this list. For example, if a company refuses to allow a shareholder to inspect its corporate charter, the shareholder has the right to sue to gain access.
• Right to attend and participate in shareholder meetings: By law, both public and private companies must hold special meetings for shareholders on an annual basis, as well as in the event of certain major junctures that affect the company’s trajectory, such as mergers, acquisitions, or bankruptcy. Shareholders benefit from a number of rules that govern the way these meetings are communicated about and conducted, such as the amount of notice companies must give shareholders that a meeting is taking place and the way meetings are documented for future inspection.
• The right to claim assets after a liquidation: When a company is unable to pay its debts by normal means, often at a time of bankruptcy or closure, it may need to sell off its assets to do so. Since shareholders are effectively a company’s co-owners, they are entitled to claim any assets left over after the company’s debts are paid. It’s worth noting that preferred shareholders are entitled to such claims before common stockholders.

Pros and cons of being a shareholder

There are many possible reasons to begin investing in stocks, from building wealth over the long term to earning passive income through the purchase of dividend-paying stocks. But before you decide to purchase your first stocks, make sure you understand the risks involved in stock ownership. Here are a few key pros and cons to consider as you learn how to become a shareholder.

Pros of being a shareholer:

• Potential for capital gains: As a shareholder, you investment could accrue capital gains, which, in the case of owning stocks, refers to the appreciation of value above the purchase price. Note, however, that such gains may be subject to tax upon the sale of the stock in question.
• Dividend income: As an investor, you may be eligible to receive dividends, or corporate earnings which get distributed amongst qualified shareholders, as determined by the company’s board of directors. Dividend income is typically issued in the form of cash or additional stock and paid on a quarterly basis. As mentioned above, dividend payouts are just one option a company has for how to allocate its profits, so remember that not all companies issue dividends. On the other hand, some companies choose to issue dividends to shareholders regardless of profitability as a gesture of goodwill and confidence.
• Ownership in the company: Company ownership through the purchase of stock is a tool that allows you as an investor to have a say in its operations. This means that you can take action, by voting, to influence the decisions a company makes that affect your potential capital gains and dividend payouts.
• Diversification: As the saying goes, “don’t put all your eggs in one basket.” That’s the idea behind diversification: owning multiple types of investments may help to insulate your overall portfolio from the negative impact of a single investment’s decline in value. So if you already own securities like bonds or mutual funds,  becoming a shareholder offers you the ability to further diversify, or spread your investments to another asset class.
• Liquidity: One of the benefits of becoming a shareholder is the liquidity of stocks as an investment relative to some other asset classes. An investment’s liquidity is the ease with which an investor can sell it for cash. Compared to assets like bonds or real estate, stocks are highly liquid, as they can generally be sold quickly. As with all assets, liquidity is variable from stock to stock. The more liquid a stock is, the easier it will be to convert your shares to cash. 

Cons of being a shareholer:

• Risk of loss: While investing in stocks has the potential to help you grow your wealth, it’s also possible that you’ll see a decrease in the value of your investment from the time of purchase. If you choose to sell these depreciated shares, you won’t receive as much in return as you initially invested, resulting in a loss. Additionally, because stocks are not FDIC insured, you may lose your investment entirely if a company in which you have invested goes bankrupt.
• Limited control: Despite the partial ownership that shareholders enjoy, the actual control you have over a company in which you’ve invested is limited. Unless you own a majority of a company’s shares, decisions concerning its management, strategy, and stock price are largely out of your hands. If a company makes decisions you don’t agree with, selling your shares is often your only recourse. Note that control is even more limited for preferred shareholders, who don’t enjoy the voting rights of their common shareholder counterparts.
• Volatility: As a shareholder, it is important to understand the relative volatility of the assets and markets in which you’re investing. Market or asset volatility is essentially a measurement of the relative risk of investing. More specifically, the more volatile a stock is, the more quickly and dramatically its price may fluctuate over time. This may result in a riskier investment.
• Fees and taxes: When you experience growth in your investment, you may be tempted to sell off shares and convert them to cash. But keep in mind that stock sales are often subject to brokerage fees, capital gains taxes, and other additional costs that cut into your ultimate returns. Make sure you understand these consequences and consider the right time to sell as it relates to your overall financial picture.

How to become a shareholder

To become a shareholder, start by setting up a brokerage account to facilitate your investment activities. A brokerage can provide guidance on suitable stocks based on your investment approach and financial goals. Whether you prefer traditional in-person brokers or robo-advisers to generate recommendations algorithmically, your brokerage will do the actual purchasing of shares for you. Once you make your first stock purchase, you become a shareholder of the company.

The ins and outs of stock ownership

Shareholders occupy an important role in the stock market. Investors influence the value of stocks through their trading decisions, help companies raise capital to achieve their goals, and contribute to major corporate decisions, all while working toward building wealth for themselves. Now that you understand some of the basics of what a shareholder is and how to become a shareholder, Stash is ready to help you get started investing your way.

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