Shareholder Definition Types Roles Rights Of Shareholders

Shareholder Definition

Explanation

The law defines the shareholder only after their name. Or the entity’s name (in case of institution) mentioned in the company’s register. Shareholders of a company or the corporation are legally separate from the corporation itself and thus are not liable for its liability. Until and unless they’ve offered a guarantee, they have limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners’ or investors’ personal assets are not at stake. Their accountability for business loss or debt doesn’t exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more to the unpaid share price underlying.

They can acquire shares either from the primary marketsPrimary MarketsThe primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer.read more (during the company’s IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more) and thus provide the capital for the corporation or from the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more. They are considered to be the subset of stakeholders of the company, which have a direct or indirect interest in the business entity like customers, suppliers, employees, and the community.

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Roles of Shareholder

Discuss, decide, and vote for the directors of the company.Decide on the directors’ salary. This has to be appropriate to compensate for the expenses and cost of living in the city where the director lives without being able to compensate for the company’s offers.Taking decisions in areas where directors have no power, including making changes at the company constitution level;They were checking and approvals of the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more as of and when they are reporting as per company Act norms.Decide on the dividend pay-out percentage and ensure the dividends are paid out.Brainstorm, vote, and decide on any organizational decision (strategy, merger, acquisition, liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more etc..)

Types of Shareholders

There are two types of shareholders.

#1 – Common

A person or an institution that owns common shares or ordinary shares of a companyOrdinary Shares Of A CompanyOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more is known as a common shareholder.

#2 – Preferred

A person or an institution that owns a “preferred share” of a company is known as a “preferred shareholder.” Regarding liability from a company’s perspective, the preferred sharesPreferred SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more are seniors to common shares and juniors to debt and bonds.

Both common and preferred get paid the agreed dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more from the company on the decided date. The “preferred” gets payment before the common shareholders and after the company pays all its debt holders and vendorsVendorsA vendor refers to an individual or an entity that sells products and services to businesses or consumers. It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers.read more.

Rights of Shareholder

Following are the six rights that shareholders get by their nature:

Voting Power: It has the right to vote for the corporate decisions concerned and limited to the company.Partial Ownership of Firm: They own part of the company proportional to the number of shares in the holder’s name.Right to Transfer Ownership: It has the right to transfer its shares to any person or institution under certain conditions.Right to Receive Dividends: They are entitled to receive the decided amount, as a dividend, in the company’s AGM (Annual General body Meeting). The dividend is for the shares they own.Right to Inspect Corporate Documents: Under the company’s activities, a firm is liable to report and file its financials. Everyone inspects any of these corporate documents on any occasion without any particular reason.Right to Sue Concerned for Wrongful Acts: They can file a lawsuit if they come across any wrongful action by the company. Wrongful action could be in terms of ethics, discrimination, fraud, etc.

Importance of Shareholder

They have the right to vote and elect the director of the firm. These directors, in turn, appoint and supervise senior executives and officers, including CFOsCFOsThe full form of CFO is Chief Financial Executive, and he or she is a top level executive of the firm who is responsible for the firm’s overall finance functions and has the authority to make financial decisions for the organization. read more, COO, and CEOCEOChief Executive Officer is the full form of CEO. He is the most senior member of a corporate organization, an executive who oversees the whole administration and operations of the company and reports directly to the board of directors and chairman, with the sole purpose of generating wealth for the company’s stakeholders and shareholders. read more. Thus they influence the firm’s operations director. Thus, they indirectly influence the share price of a stock in a market. It can trade its shares in share markets for money and pledge to raise money. The supply and demand of any particular company’s shares in the market define, fluctuate and decide the share price.They invest the money as capital in the company and expect returns when the company makes profits, so they are one of the company’s or corporation’s important stakeholders. If a company liquidates, creditors are first in line to receive their debts. Next comes the bondholders who hold bonds of the company. Common shareholders are next and last in line to have their debts paid in case of the company’s liquidation. They are the most important stakeholder and participate in the company’s management.

Difference between Shareholder and Stakeholder

All Shareholders are no doubt the stakeholders, in fact, vital stakeholders of that particular company. However, the reverse is not true (vendors, customers, and employees are not shareholders).Stakeholders are not owners of the company, but shareholders are the owners of the company. The number of shares decides their percentage of ownership.Stakeholders do not have voting rights.Stakeholders don’t get dividends. Whereas shareholders get dividends as decided in the general body meetings.Shareholders are last in line to receive liability when the company files for bankruptcy. Whereas stakeholders receive their debt as per their rank in order (Employees, vendors, creditors, and bonds holders)

Limitations

Volatility: The price at which a stock trades in the market can fluctuate. Thus shareholders have to bear the risk of volatility.Dividends: There is no fixed dividend percentage or compulsion for the companies to pay the dividends.Financial Performance: Shareholders’ returns are solely decided by profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more and financial performance.Bankruptcy: They are last in line to receive their debt if a company goes bankrupt and files for liquidation.