Equity trading, in the past few years, has gained traction among traders in India. Previously, most individuals preferred to park their savings in low-return deposit options, wherefrom returns were guaranteed, and the risks associated were low. However, in recent times, more individuals are welcoming to the idea of undertaking risks for the prospects of higher returns. As a result, the number of shareholders in stock market trading has also increased manifold.
What is a Shareholder?
The term ‘shareholder’ is used to denote any person, institution or company that has ownership of at least one share of a company’s stocks, also referred to as equity. Also known as stockholders, such entities are partial owners of a company and are entitled to a share in the profits that the said company generates. These profits are provided to stockholders by way of dividend distribution, or through an increase in stock valuation.
Similarly, when the share price of a company drops due to losses suffered by it in a given year, shareholders to suffer a loss from their investment. It consequently leads to a decline in their portfolio value.
In this regard, it is crucial to note that when a company liquidates its assets, common stockholders receive their proceeds only after bondholders, creditors, and preference stockholders have received their portion of the profit. Furthermore, in case a company declares bankruptcy, stockholders also stand a chance of losing their entire investment.
Shareholder Meaning: Basics of How Stockholding Works
An entity that controls more than 50% of a company’s outstanding shares is known as a majority shareholder and wields substantial power when it comes to making key decisions for the company’s operations. Conversely, entities with less than 50% ownership of a company’s shares are referred to as minority stockholders.
Majority stockholders, in most cases, are the company’s founders, or their descendants. Since such entities have ownership over 50% of a company’s shares, they also control the equivalent percentage of the company’s voting interests. As a result, majority stockholders play quite an essential role in undertaking executive decisions like appointment or replacement of board members, and senior personnel like chief executive officers, and such.
Here, it is important to note that while majority shareholders do play a crucial role in making key decisions for a company, they are not personally liable for said company’s financial obligations or debts. Thus, unlike the case with partnerships or sole proprietorships, a shareholder’s personal assets remain safe even if the company becomes insolvent.
Rights of Shareholders
Since a shareholder is de facto a part-owner of a company, he/she enjoys several rights as per company bylaws. Few of these include –
- Control over the company’s key executive decisions, like the appointment of board members, approval or dissent on potential mergers, etc.
- Receiving dividends.
- Rights to look through a company’s records and books.
- Attending annual general meetings, either in person or through conference calls.
- Power to sue a company, in case of misdeeds on the part of its officers or directors.
- Entitlement on the proportionate allocation of proceeds collected in the event of liquidation of a company’s assets.
- In case a shareholder is unable to attend a meeting, he/she has the right to vote on a company’s key matters by proxy, via online platforms or mail-in ballots.
Types of Shareholders
Shareholders of a company are of two types – common and preferred shareholder.
- Common share or stockholders –
As their name suggests, they are the owners of a company’s common stocks. These individuals enjoy voting rights over matters concerning the company. Furthermore, they can also exercise the aforementioned rights, including filing class-action lawsuits against any matter that can harm the organisation.
- Preferred share or stockholders –
Preferred stockholders, on the other hand, enjoy precedence over common stockholders when it comes to a company’s profit distribution. While they do not hold a right to vote in matters pertaining to a company’s executive decisions, preferred stockholders are entitled to fixed dividend rates, even if said company’s profitability is at stake.
The following table illustrates the difference between the two types of shareholders lucidly.
|Parameters||Common Shareholders||Preferred Shareholders|
|Dividend distribution||Common stockholders enjoy dividends generated from the profit in business.||Preferred stockholders enjoy precedence over a common shareholder pertaining to dividend distribution.|
|Voting rights||Common stockholders enjoy voting powers regarding executive decisions of a company’s operations.||Preferred shareholders do not enjoy voting rights over matters of the company.|
|Profitability||Dividend distribution among common stockholders is done on the basis of how a company performs in a particular year. For instance, if a company incurs losses in a given year, common stockholders incur losses as well. Similarly, if it generates higher profits, the stockholders are also entitled to receive higher dividends.||Preferred stockholders are entitled to receive dividends at a fixed rate, which is not influenced by a company’s performance.|
|Procedure during insolvency||Common stockholders carry a high liability if a company declares insolvency, and also stand a chance of losing their entire investment.||During insolvency, preferred stockholders have a right to claim the company’s assets.|
Importance of Shareholders
While these part-owners earn profit by investing in a company’s stocks, they also play an important role in operating, financing, governing and controlling various aspects of a business. For instance,
- Company operations
While stockholders directly influence company operations by way of appointing senior office personnel, they also influence a company’s operations in other ways. For instance, most investors prefer to invest in stocks that can meet their earning-expectations, thus keeping companies under constant pressure to meet their sales and profit projections.
- Financing a company
Companies receive financing from stockholders in lieu of ownership rights. Start-ups and private companies can also raise capital by way of private placements or share issues to select institutions and individuals.
- Governing a company
Board members of public companies are required to maintain transparency with the list of shareholders regarding its business condition and operations. In fact, senior executives of such companies spend a few days of each quarter discussing matters pertaining to the company’s governance with market analysts, stockholders and such entities.
- Control over a company
Stockholders can exercise their powers over determining who will control a company’s operations. For instance, stockholders can effectively prevent takeover attempts if they believe that the offering price is insufficient.
Thus, with control over the majority of aspects of a company’s operations, shareholders play a significant role in its overall performance and profits.