I. Introduction
The person or entity who owns a portion of shares of a company is known as a shareholder. Buying shares is what shareholders do when they invest in a company, paying for it with money. In return the company gives them rights like the ability to vote on major decisions, to get paid out in dividends, and to reap residual cash in the case of capital gains returns. Generally, the way a shareholder does their bit depends on how many shares they own. Big shareholders are most likely to have a lot of influence in corporate governance while small shareholders have little input.
The meaning of shareholder is a reference to the holding of shares—that is, the role they play in providing capital to a company for its growth and expansion. The profits made by the company benefit shareholders, and the risks borne by it are losses to shareholders. Public companies that are traded on stock exchanges tend to have many different shareholders—from ordinary retail purchasers to big institutional investors, such as mutual funds and pension funds.
II. Understanding shareholders
In the corporate world, shareholders play an important part, as they help the company make decisions and gain rewards. Embracing the importance of shareholders, understanding who they are, and how you can differentiate between them is crucial.
A. Definition
Another name for a shareholder is the stockholder. The meaning of shareholder is an individual, company or institution that owns at least one share of a company’s stock. Shareholders are essentially partial owners of the company with rights and privileges, which may include the right to vote in corporate matters, to distribute dividends and ultimately to benefit from the growth of the company. For a possible return on the investment, shareholders deposit money into the company. However, if the company is being liquidated, which means that it is being sold with its assets, then the shareholder may get back a part of that money.
B. Types of shareholders
There are basically two types of shareholders: preferred shareholders and common shareholders. Common shareholders are the more prevalent type of stockholders. The stock they hold is common stock. That gives them the right to vote on matters pertaining to the company. They also have the right to file a class action lawsuit against the company if required, because they control how the company is managed.
That means they have the right to object to any wrongdoing that can put the organization at risk of harm. On the other hand, unlike common shareholders, preferred shareholders own what is known as the preferred stock of the company. This comes with no rights to vote and no rights in relation to deciding how the company may be managed.
More on the two types of stock below.
III. Shareholder equity
Shareholder equity represents the owners’ claim on a company’s assets after all liabilities are paid. It is calculated as total assets minus total liabilities and includes retained earnings, capital stock, and additional paid-in capital. Positive shareholder equity indicates a financially healthy company, while negative equity suggests financial distress. There are two types of shareholder equity—common and preferred.
A. Common Equity
Common equity represents the ownership stake held by common shareholders in a company. It consists of the initial capital invested by shareholders plus retained earnings. Common shareholders have voting rights in corporate matters, but they are last in line for dividends and asset distribution, receiving funds only after debts and preferred shareholders are paid.
The par value of shares times the number of shares outstanding equals the value of common stock. For example, imagine if the common share of 1 million shares with a par value of $1 would create $1 million of common share capital in the balance sheet.
B. Preferred Equity
Preferred equity refers to a class of ownership in a company that has a higher claim on assets and earnings than common equity. Preferred shareholders typically receive fixed dividends and are given priority in asset distribution during liquidation, but they usually don’t have voting rights in corporate governance decisions.
Read More: What Is Equity Share Capital & How To Calculate It?
IV. Shareholder rights
The principal element of any corporation includes the shareholders who invest capital in exchange for the shares in the corporation. The meaning of shareholder refers to someone who has the right to receive dividends if the company grows and to participate in the management of the company. These rights protect shareholders from the wrongs sometimes committed by company directors and ensure their interests are protected.
A. Voting rights
Shareholders have special rights such as the right to vote on a company’s major decisions. In this, the shareholders have a veto over most of the decisions made by the company such as the makeup of the board of directors, mergers and acquisitions, and policy. This usually means the more shares you have in a certain company, the more power you have to control how that company is run. The company’s structure can give shareholders, depending on the company’s structure, the right to vote concerning executive compensation as well as other governance matters.
B. Dividend rights
Dividends are shares of the company’s profits paid to shareholders. However, the companies can decide not to pay dividends. The board of directors usually decides to pay dividends but not always. However, all holders of shares have the right to a proportionate share of dividends when these are declared. This makes sure the investors enjoy the company’s success either with cash payments or via additional stock dividends.
C. Right to information
For the protection of shareholders’ interests, transparency is paramount; yet companies are obliged to provide shareholders with necessary information. What this includes is access to financial statements, annual reports and the company’s performance and strategy disclosures. At annual general meetings, which shareholders can attend and hear the company management put questions and answers to them, shareholders also have some rights. The right to information provides shareholders with a means to make decisions about investments based on information.
D. Right to sell shares
Shareholders can liquidate their investments or take advantage of market conditions any time of the year as they have the right to sell their shares. Liquidity offered by shareholders is a factor further enhancing flexibility in the management of shareholders’ portfolios. Private companies sell shares in easier ways to the public, while shares from a publicly traded company have more easily accessible platforms for share trading. As an investor, you need this right because you may want to change your holdings based on your financial goals.
Read More: What is Share Capital & What Are Its Types?
V. Shareholder Responsibilities
Now you know the meaning of shareholders and the role of shareholders in the management and operation of organizations. Apart from merely owning shares and receiving dividends, shareholders are financially and legally bound to strive for the firm’s success. These responsibilities play a major role in keeping the company free from mischief and at the same time ensuring good accounting practices.
A. Financial responsibility
One of the major duties of shareholders is of a financial character. Shareholders contribute capital by issuing shares in the firm, and this forms the main capital base for the firm. Even in further rights issues or calls for capital, shareholders are normally required to put more of their money into buying more shares to retain their interest in the enterprise.
Also, shareholders ought to also shoulder the responsibility of comprehending the operating efficiency of the business. Annual reports of shares incorporate reports such as balance sheets, and profit and loss accounts, to enable shareholders to decide on whether to retain or dispose of shares or acquire more shares.
B. Legal obligations
The shareholders also have legal obligations which are supposed to be followed. However, shareholders are not permitted to intrude in corporate governance legal frameworks of the conduct and rights of the shareholders. They must appear at shareholder meetings, agree to significant decisions such as mergers and acquisitions, or choose new directors to make sure that they do not violate the charter of the company. Moreover, in a conflict of interest situation shareholders are under a legal duty to protect the company’s interest.
VI. Conclusion
People or firms that buy shares of the company’s stock equity share in a business are known as shareholders. Shareholders’ interest in any given business venture is known as equity and refers to the amount of money they have contributed to that business venture. Equity holders have the right to vote, this being one of the most important political rights, and have first call on companies’ profits, usually by receiving dividends. The meaning of shareholder includes voting in corporate matters such as director’s election, restructuring, and financial reports.
Also, in such matters as rights issues, shareholders are able to purchase more shares at a cheaper price to keep their stake intact. In any case, shareholders perform important functions in management concerning the development of the enterprise and its financial prospects.
FAQs
1. What are stakeholder and shareholder rights?
The right of the stakeholders to the firm depends essentially on the status of the firm regarding whether it is an employer, consumer, or supplier. However, shareholders have rights, the right to vote on the large important issues in the company, and the right to receive a part of the revenue from the sales of the company’s products.
2. What are the rights of equity shareholders?
Equity shareholders, however, do still retain their right to decide on important matters; they can also ask for a dividend payment, they can retrieve the financial information regarding the firm and in the event the firm is dissolved, they could well have the right to take the remaining assets. They also have a right to meet at the company to be informed about meetings and to participate in the decision-making process in the company.
3. What is stockholders’ equity?
Other names of stockholders’ equity or shareholders’ equity are equal to the value of a company’s total assets minus its total liabilities. The ownership interest of the corporation by shareholders includes common stock, preferred stock, retained earnings, and additional paid-in capital.
4. What is the role of a shareholder?
Shareholders invest their money in companies in return for stakes within a firm. They choose members of the board of directors; they vote on many strategic organizational matters; and they receive their profits through regular dividends and changes in the value of the shares contingent upon organizational performance.
