What is a Shareholder?

Whether it is an emerging startup or a well-established multinational corporation, shareholders are at the heart of every company. But what is a shareholder, and why are they so integral to the business ecosystem? 

Simply put, shareholders are individuals or entities that own a portion of a company. They provide the funds that enable companies to grow, innovate, and thrive. In this article, we will explore the meaning of a shareholder, how shareholding works, the different types of shareholders, their rights, and their importance to a company. 

Shareholder Meaning

A shareholder, also known as a stockholder, is an individual or entity that owns the shares of a company. By owning a company’s shares, the shareholder becomes a part owner and gets to enjoy certain rights and responsibilities.

Being partial owners, shareholders can influence a company’s decision-making process by voting on issues in general meetings. The influence of a shareholder in company matters is directly proportional to the number of shares they hold. For instance, an individual or entity that holds a large number of shares in a company often has a significant say in the various policies and decisions. 

Read More About What is a shareholder register? 

How Does Shareholding Work?

Now that you know the meaning of a shareholder, let us look at how shareholding works in a typical company. 

To become a shareholder, you must first invest in a company by purchasing its shares. You can purchase a company’s shares through an Initial Public Offering (IPO) or via the stock exchange. Let us look at a hypothetical example to better understand this concept.  

Assume there is a company called TechNova Limited. The company issues 10 lakh shares, with each one priced at ₹100. Let us say you purchase 10,000 shares. You not only become a shareholder of TechNova Limited but you also now own 1% of the company [(10,000 shares ÷ 10 lakh shares) x 100].

Similarly, another individual purchases 2,500 shares. They will also become a shareholder of the company and own 0.25% of the company [(2,500 shares ÷ 10 lakh shares) x 100].  

What are the Various Rights and Responsibilities of Shareholders?

The shareholders’ rights and responsibilities vary depending on the type of shares they own. Here is a quick overview of the various rights available to stockholders. 

• The right to participate in general meetings and voice their opinions on company policies.
• The right to vote on significant corporate decisions, such as mergers, acquisitions, and the election of board members in a general meeting.
• The right to receive a share of a company’s earnings in the form of dividends.
• The right to access financial reports, annual statements, and other key information about the company’s performance.
• The right to buy more shares of the company and sell or transfer their shares to another individual or entity.  
• The right to take legal action against the management if they believe that the company is being mismanaged or if their rights are being violated. 
• The right to receive the proceeds from the liquidation of the company’s assets proportionate to their shareholding.   

What are the Different Types of Shareholders?

Shareholders can be broadly categorised into two different types: equity shareholders and preference shareholders. Let us explore each of the two categories in more detail. 

• Equity Shareholders 

Individuals and entities that hold equity shares in a company are termed equity or common shareholders. These shareholders get voting rights in the company and are entitled to dividends. Dividends are essentially the company’s profits that are distributed to its investors. 

However, it is important to note that dividend distributions are not guaranteed, meaning that the company may choose to skip issuing dividends to its equity shareholders. Additionally, they are also the last to receive dividends and liquidation proceeds. Common shareholders also benefit from capital appreciation in the form of an increase in the value of the shares due to good financial performance.

Know More About What is Shareholder Equity?

• Preference Shareholders 

Individuals and entities that hold preference shares in a company are termed preference or preferred shareholders. These shareholders get to enjoy fixed dividends that are guaranteed but do not get any voting rights in the company. 

As far as capital appreciation is concerned, only certain classes of preferred shareholders, such as those holding convertible shares, get the benefit. Preference shareholders enjoy a higher claim on assets and earnings than common shareholders. This essentially means that they receive dividends and proceeds from the liquidation of the company before equity shareholders.  

How Important are Shareholders for a Company?

Shareholders are vital cogs in any company and are important for its success. They provide the capital that the company requires to carry out its business and expand. Furthermore, they also play a major role in the company’s governance by actively participating in the decision-making process and ensuring that the management works towards the welfare of the company and its investors.    

As a matter of fact, shareholders serve as a barometer for the company’s health. High levels of shareholder engagement often reflect a strong, well-managed company. On the other hand, low shareholder confidence often indicates trouble and may even impact the company’s ability to raise funds and attract new investors.

For any company, maintaining a good relationship with its shareholders is essential. Being transparent in communication, displaying accountability for its performance, and adhering to corporate governance principles are key to ensuring shareholder satisfaction.   

Conclusion

With this, you must now be aware of the meaning of a shareholder and the various rights they get to enjoy. Shareholders are integral to a company’s success. They contribute capital, influence decisions, and take part in its successes and failures. 

Just like how it is important for shareholders to maintain a mutually beneficial relationship with the company they are invested in, companies must also work toward nurturing strong ties with their shareholders to succeed in the long term. 

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