Equity trading has gained popularity among Indian traders in recent years. Previously, most people chose to keep their money in low-return deposit accounts, where returns were guaranteed and dangers were minimal. However, in recent years, more people have become open to the idea of taking risks in exchange for larger rewards. As a result, the number of stock market shareholders has expanded dramatically.

What is a Shareholder?

Any individual, institution, or organisation that owns at least one share of a firm’s stocks, also known as equity, is referred to as a shareholder. These entities, also known as stockholders, are partial owners of a company and are entitled to a share of the profits generated by that company. These earnings are distributed to stockholders in the form of dividends or an increase in stock value.

Similarly, when a company’s share price falls due to losses sustained during a particular year, shareholders lose money on their investment. As a result, the value of their portfolio decreases. In this regard, it’s important to remember that when a firm liquidates its assets, common stockholders get their money only after bondholders, creditors, and preference stockholders get theirs. Furthermore, in the event that a company goes bankrupt, stockholders risk losing their whole investment.

Shareholder Meaning: Basics of How Stockholding Works

A majority shareholder is an entity that owns more than half of a company’s outstanding shares and has significant clout when it comes to making crucial decisions about the company’s operations.

In most situations, the majority stockholders are the company’s founders or their heirs. Because such entities own more than half of a company’s stock, they also have a controlling stake in the company’s voting interests. As a result, majority investors have a critical role in executive choices such as the nomination or removal of board members and top executives such as CEOs and other executives. It’s worth noting that, while majority shareholders play an essential role in a company’s key decisions, they are not personally liable for the company’s financial responsibilities or debts. In contrast to partnerships and sole proprietorships, a shareholder’s personal assets are protected even if the company goes bankrupt.

Shareholders’ Rights

A shareholder has many rights under company bylaws since he or she is de facto a part-owner of the company. Few of these include –

  • Control over critical managerial decisions, such as board member appointments, approval or dissent on proposed mergers, and so forth.
  • Receiving dividends.
  • Rights to inspect a company’s books and records.
  • Attending yearly general meetings, either in person or via the phone.
  • The ability to sue a corporation for wrongdoings committed by its executives or directors.
  • Right to a proportionate share of proceeds collected in the case of a company’s assets being liquidated.
  • If a shareholder is unable to attend a meeting, he or she may vote via proxy, online platforms, or mail-in votes on the company’s major issues.

Types of Shareholders

There are two types of shareholders in a corporation: common and preferred shareholders.

1) Common share or stockholders

They are the owners of a company’s common stocks, as the name implies. These persons have the ability to vote on items affecting the organisation. They can also utilise the rights described above, such as bringing class-action lawsuits against any matter that could affect the company.

2) Preferred share or stockholders

When it comes to a company’s profit sharing, preferred stockholders have precedence over common stockholders. Preferred investors are entitled to fixed dividend rates even if the company’s profitability is at risk, despite the fact that they do not have a vote in management decisions.

Difference between common shareholders and preferred shareholders

BasisCommon ShareholderPreferred shareholders
Distribution of dividends      Dividends from corporate profits are distributed to common stockholders.  In terms of dividend distribution, preferred investors have an advantage over common stockholders
Voting rights  Common stockholders have voting right in executive decisions affecting a company’s operationsPreferred shareholders do not have voting rights in business matters
Profitability      Dividends are paid out to common investors based on how well a firm does in a given year. For example, if a corporation loses money in a year, ordinary investors lose money as well. Similarly, if the company makes more money, the stockholders are entitled to more dividends.Preferred stockholders are entitled to a fixed rate of dividends that is unaffected by a company’s success.
Procedure during insolvency         .If a firm declares insolvency, common investors face a large obligation and the risk of losing their entire investment-Preferred stockholders have a right to claim the company’s assets in the event of insolvency

Shareholders’ Importance

While these part-owners profit by investing in a company’s shares, they also play an essential role in the company’s operation, financing, governance, and control. As an example,

1) Operation of the business

While investors have a direct effect on a company’s operations through appointing senior office workers, they also have an indirect influence. Most investors, for example, want to invest in equities that can achieve their earnings expectations, putting companies under constant pressure to meet sales and profit targets.

2) Financing a company

In exchange for ownership rights, companies receive funding from stockholders. Private placements or share issues to chosen institutions and people are another avenue for start-ups and private firms to raise cash.

3) Governing a company

Board members of public firms are obligated to keep the list of shareholders informed about the company’s financial state and operations. Indeed, senior executives of such businesses spend a few days each quarter with market analysts, stockholders, and other similar organisations discussing issues relating to the company’s governance.

4) Control of a business

Stockholders have the ability to decide who will be in charge of a company’s operations. For example, if stockholders consider the offering price is insufficient, they can effectively prevent takeover efforts.

Shareholders’ agreement

A shareholders’ agreement can strengthen minority shareholder rights. This is an agreement reached by all or portion of the company’s shareholders. It governs the interaction between shareholders and the company’s management, as well as share ownership and shareholder protection. A contract like this also governs how the business is run. Shareholders’ agreements are frequently employed as a safeguard to protect shareholders, as they can cover a variety of scenarios.

As a result of their control over the majority of a company’s activities, shareholders have a considerable impact on the company’s overall success and profitability.

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Mutual Funds vs Shares – Which is better to invest money in?