What are Shareholders?

Published by Thomas Herold in Corporate Finance, Investments, Trading

'Shareholders' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Shareholders are companies, people, or institutions which own minimally a single share of the stock in a given company. They can also be referred to as stockholders. These stockholders are not only investors, but also the owners of the corporation. As owners, they gain the advantageous results from the firm’s success. This can translate into higher stock prices, dividend payouts, or hopefully both. Should the corporation not perform well, the stock holders can similarly lose value in their investments as the stock price goes down.

There is a difference between shareholders and owners of partnerships and sole proprietorships. The stakeholders in corporations do not experience personal liability for the financial and debt obligations of the corporation. Should the company in question fail, creditors can not attempt to secure payments or assets from the stockholders as they might be able to do from owners of entities which are privately held.

Corporations with shareholders have another important difference from other structures of businesses. They depend on their executive management and board of directors to handle the day to day operations. This means that the stock holders do not have much control over the daily operations of the company.

Shareholders may not have much involvement in the company’s decisions, but they still have important rights. These are specified by the corporation’s bylaws and charter. One of these is the right to go through the company records and financial books. Another is to sue the company for officer and director committed mistakes. Even common stock holders have the right to vote on important corporate decisions like whether to agree to a potential merger or on the makeup of the board of directors.

Shareholders have what may be their most important right when a company goes into liquidation through dissolution or bankruptcy. They have the rights to regain a representative amount of the recovered proceeds. They are in line after the secured debt holders including bondholders, preferred stock holders, and creditors, all of whom have precedence over the common stockholders.

Stock holders have several other rights which they enjoy. They receive a part of dividends which their company announces. They also gain the privilege to attend in person the annual meeting of the corporation. Here they are able to learn more regarding the performance of the firm. They can also choose to sit in on the meeting using a conference call. If these common stock holders are not able to or interested in going to the annual meeting, they can instead choose to vote through the mail or online using a vote by proxy. All of these rights which belong to preferred and common shareholders are detailed in the corporate governance policy.

A great number of corporations elect to create two classes of stock. These are common and preferred shares. The majority of stock holders purchase and hold common stocks since they are more of them and they are less expensive than preferred shares. Unlike preferred stock holders who are due to receive dividends every quarter, common shareholders must wait on the board of directors to decide if and when they will be paid a dividend in a given quarter. The directors must decide if this is an appropriate way to utilize the corporation’s funds.

Preferred stockholders lack the voting rights of common shareholders. They do receive higher dividends on a more frequent basis. Their payments have to be paid at least yearly and their dividends are also guaranteed. For investors more interested in creating a reliable annual income from investments, preferred shares can be a very helpful tool.

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The term 'Shareholders' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.