Companies sell shares of stock to raise capital. Investors and other entities that purchase those shares are called shareholders. A shareholder is also known as a stockholder. Being a stockholder means you have an ownership stake in that company. The more shares you own, the larger your ownership stake. Shareholders can own common stock or preferred stock, depending on which type of shares the company issues, with each one conveying different rights and benefits. A financial advisor can help you identify and take advantage of all the rights and powers you have as a stockholder.
What Is a Shareholder?
In simple terms, a shareholder is someone that owns shares of stock in a company. A share is a fractional ownership interest in a particular company. It’s possible to hold shares in privately held companies though the everyday investor is more likely to hold shares in companies that are publicly traded on a stock exchange.
When companies issue shares of stock for the first time this is often done through an initial public offering (IPO). This allows new investors to purchase shares, alongside existing shareholders. Shareholders can be individual investors. But they can also be institutional investors or other companies.
What Does a Shareholder Do?
Shareholders don’t participate in the day-to-day operation of a company directly. In other words, if you buy 100 shares of Microsoft stock no one’s going to ask you to oversee the budget or sit on the board of directors. But shareholders can still have a say in what goes on with the company and how it’s run.
Companies hold regular shareholder meetings, during which various topics or issues can be discussed and voted on. For example, a company you invest in may put forward several new elections for additions to the board of directors. As a shareholder, you may be able to vote whether to accept or reject those elections.
In addition to voting rights, shareholders can also enjoy certain financial benefits including dividend payouts. A dividend represents a share of a company’s profits. Not all companies pay out dividends to stockholders. But if you’re invested in one or more companies that do, those dividends could provide a valuable source of passive income.
Shareholders also benefit from increases in stock prices. Say you buy 100 shares of a company at $10 each, then six months later, the stock price jumps to $40. If you were to sell, you could reap a $30 profit per share. The downside, of course, is that if the stock declines in value then your shares might end up being worth less than what you originally paid for them.
Common Stock vs. Preferred Stock Shareholders
Companies can distinguish between different types of shareholders, based on the kind of shares they own. Specifically, companies can issue shares of common stock or preferred stock. If you own shares of common stock, you’re considered to be a residual claimant. That means if the company files bankruptcy, you’d be last to get paid behind the company’s creditors and preferred shareholders. Common stock shareholders are also the last to receive dividends.
Preferred shareholders get priority for debt repayment and for dividend payouts. So that means if you’re a common stock shareholder you might end up with no dividend payout at all if there aren’t enough profits to go around after preferred shareholders have been paid.
But you do get something that preferred shareholders don’t. As a common stock shareholder, you’re allowed corporate voting rights.
What Is a Shareholder vs. a Bondholder?
Stock shares are a form of equity, which is another way to describe an ownership stake. Owning stocks conveys ownership in the underlying company, as measured by the number of shares you own.
Bonds, on the other hand, are a form of debt. Companies can issue bonds to raise capital and in doing so, they essentially borrow money from investors. This money is then paid back to the investor, known as a bondholder, with interest.
Shareholders can make money through capital appreciation if the stock’s price rises and dividends. Bondholders make money through the interest earned on the bonds issued. Both face risks, as stock shares can drop in value and dividend payouts can dry up while companies that are struggling financially may end defaulting on bond payments.
What Is a Shareholder vs. a Stakeholder?
A stakeholder is simply an individual or entity that has a direct or indirect financial interest in a company. That can include its board of directors, employees, suppliers and customers.
Stakeholders can be affected by a company’s financial decision-making. For example, say a company decides to lay off 500 workers because a recession shrinks profit margins. The stakeholders that may experience the most immediate impacts are the laid-off employees. But customers can also be affected if the layoff affects production and reduces supplies of the company’s products.
Increased demand for those products could result in the company charging higher prices for them. This could help to increase profits, benefitting shareholders and bondholders alike.
How to Become a Shareholder
Becoming a shareholder in a publicly traded company is as simple as opening a brokerage account. Many online brokerages allow you to buy and sell individual stock shares commission-free. You can pick and choose which stocks you want to buy, based on your risk tolerance, goals and time horizon for investing. When purchasing shares, consider whether you’re getting common stock or preferred stock. And if the stock pays out dividends, think about what you’d like to do with them. You could choose to receive dividends in cash or in stock. Companies may even allow you to reinvest them automatically through a dividend reinvestment plan (DRIP).
It’s also possible to become a shareholder if you have access to an employee stock purchase plan (ESPP). These plans allow employees to purchase shares of stock in the company they work for at a discount. As a shareholder, you’re considered to be a partial owner of the company. You can ask your benefits coordinator whether purchasing stock through an ESPP is an option.
The Bottom Line
Being a shareholder in a company can convey certain rights and benefits, including voting rights and dividend payouts. Investing in stocks can also help you build wealth over time if you’re using them to create a diversified portfolio. Just keep in mind that shareholders aren’t the same as bondholders or stakeholders.
Tips for Investing
- Consider talking to a financial advisor about what it means to be a shareholder and how to exercise your voting rights if you own common stock. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready, get started now.
- If you’ve decided you want to start investing, the first thing you’ll want to figure out is how much you want to invest, how much risk you can take on and how long your time horizon is. All of this will inform how you allocate your assets. Remember, diversification is key.
- Don’t forget to pay attention to the taxes that you will owe when investing in the stock market. SmartAsset’s capital gains tax calculator will show you how Uncle Sam impacts your gains.
- When choosing individual stocks, there are some different strategies and metrics you can use to compare them. For example, if you’re a buy-and-hold investor then you may choose to focus on fundamentals. These are different measures of a company’s overall financial health. If you lean toward active day trading, then you might be interested in technical analysis instead. Technical indicators can be used to identify trends in stock pricing and market momentum. Thinking along those lines can help you decide which types of stocks may work best and what kind of features to look for in a brokerage account.
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