What Does it Mean to Be a Shareholder in a Company? A Closer Look

Most corporate organizations with more than one member are owned by shareholders.

Apparently, big organizations stand firm on the collective efforts of shareholders to continue operational activities.

Shares are stocks individuals or companies buy to claim ownership of a company. This purchase comes with an agreement of interest or benefits before the acquisition of shares.

In this article, we will take a closer look at what it means to be a shareholder in a company. Read along!

What is a Shareholder?

A shareholder is any individual, business, or organization that holds stock in a company or mutual fund. Shareholders share in the ownership of a company, which gives them rights and obligations to certain decisions and is a significant part of the company.

They can benefit from the success of a business when they have this kind of ownership.

There is no limit to the number of shares you can acquire, which is why you have to understand what it means to be a shareholder before becoming one.

What Does It Mean To Be A Shareholder

Purchasing a share of the company, automatically makes you a shareholder, giving you a partial ownership interest in the business. In addition to potentially receiving dividends if the company distributes its profits, shareholders can normally vote on important business issues, like the appointment of the board of directors.

Furthermore, if the company's stock value rises and shareholders are able to sell their shares for more money than they were originally paid, they stand to gain.

Shareholders are overwhelmed with responsibilities such as:

• Depending on the kind and quantity of shares held, becoming a shareholder can provide one with both financial benefits and an influence on the company’s decision-making.
• Determining the salary of directors or managers.
• Shareholders have the power to make constitutional changes.
• They are responsible for checking and making financial approvals in the company.

Types of Shareholders

While we look forward to understanding what it means to be a shareholder, there are three types of shareholders you need to know about:

1. Common Shareholder

Common shares are more widely available for regular investors than preferred stock. Oftentimes, corporate organizations publicly announce the availability of common shares for purchase. Average income earners can purchase small shares in small units.

Shareholders enjoy the advantage of voting on issues regarding the company. Should the company experience bankruptcy, the common shareholders are the last to receive dividends or payments.

2. Preferred Shareholder

This type of shareholder owns a larger part of the company's stock, but they are not entitled to vote or have influence on the business's operational activities. Instead, they will receive a predetermined annual dividend amount before the common stockholders receive their portion.

Usually, preferred shareholders get dividend payments from companies before other shareholders when companies earn surplus funds. Furthermore, equity shareholders are not paid during insolvency until the preferred shareholders have been compensated.

Preferred shareholders bring in large capital that is distinct from that of common shareholders. These are the reasons organizations prioritize preferred shareholders during dividend payments.

3. Debenture Holders

Debenture holders invest in the company by offering loans to receive them back with interest. They are usually called lenders; they make funds available to generate interest even in the bankruptcy phase. The debt owner is never concerned with the company's decision-making plans. They are strictly businessmen concerned with money matters and interest in every investment made.

Pros of Being A Shareholder in a Company

Being a shareholder in a corporate organization has its advantages.

1. Receive Dividends

Dividends are allocated to shareholders from the company’s profit. When a business is successful, the board of directors is responsible for allocating dividends to shareholders based on the portion of their investment.

2. Liquidity

Publicly traded markets have shares in the form of liquid assets, which may be easily bought and sold on the stock market.

3. Diversification

Acquiring stocks in several different companies spreads out the exposure to the performance of any one company, allowing for investment risk diversification. When you spread your assets by investing in various companies, you are prone to low risk, unlike someone who invests his all in a sole company, should any harm come to the business, he might lose it all.

4. Little or No Risk

In contrast to other business ownership structures, shareholders are shielded from liability and cannot be sued if the business fails, unlike sole proprietors. Even though it can be significant, a shareholder's risk is only as much as what they paid for the shares.

5. Freedom to Sell Your Shares

You may not necessarily keep a lifelong commitment to a company as a shareholder. You’re liable to sell off shares if you wish.

Cons of Being A Shareholder in A Company

Here are the disadvantages of being a shareholder in a company.

1. Volatility

The value of shares can be extremely volatile, which may be due to factors including corporate performance, market sentiment, and economic conditions.

2. Dividend Risk

Investors who depend on dividend income from the company may be uneasy if the company chooses to cut back on or stop paying dividends. Dividend payments are not fully guaranteed, as businesses may experience a loss or a loss of contract.

3. Limited rights

If shareholders do not possess a substantial amount of the firm's shares, their ability to influence company decisions and management may be restricted. You may not influence major decisions in the company.

4. Market Risk

Broader market trends, geopolitical developments, and other variables outside the company's control may impact share prices.

Importance of Shareholders in an Organisation

Here are some of the importance of shareholders in an organisation.

1. Governance

Shareholders own a portion of a company, which is why the board of directors keeps shareholders informed about the state and activities of the company. Market analysts, investors, and other organizations are set aside by senior executives of these companies to debate issues related to the company's governance.

2. To generate Capital

Corporate organisations generate capital from shareholder's investments for the company's operational activities and expansion. Startups and new businesses can take advantage of this.

3. Ownership power

A public company's shareholders often decide who is in charge. A corporation that is widely held and does not have a single majority stakeholder is susceptible to hostile takeover attempts.

If shareholders are happy with the current management or think the offering price is too low, they have the ability to block such actions. Institutional shareholders have the right to openly urge management of the company to take strategic measures, such as selling the business or combining with another.

4. Accountability

Investors hold management accountable for every action and decision made in the company. Every shareholder would take any measures to be sure that their shares are secured, so they demand accountability from the board of directors and business owners.

How To Become A Shareholder in a Company

Becoming a shareholder in a company typically involves purchasing shares of that company's stock through the following options:

1. Brokerage Firms

Brokerage buys and sells stock with other financial institutions. Also, individuals can purchase and sell stocks at a set price through an online brokerage service, but there will be a commission charged for each transaction.

2. Making Purchase

The purchase of stock is done after a proper assessment. One can purchase the stock following a thorough analysis. Either the broker or the internet brokerage platform is used for this.

To ensure one can afford the stock price before making a purchase, new accounts typically have a minimum balance requirement.

After establishing their budget, one can acquire the shares. Here, the investor must be aware of the stock's market price as well as its present fluctuating rate.

3. Investing in Private Companies

The Board of Directors must approve a person or organization before allowing them to become a shareholder in the company through a passed motion. When it comes to private businesses, the company secretary closely monitors a book where stock transactions are meticulously documented. The agreed sum is given to the business after a discussion of share prices. After that, ownership information is recorded in the notebook, and joint documents that the secretary and the owner sign as evidence of ownership.

What Qualifies You To Become A Shareholder?

In corporate organizations, there are rules that govern every decision and activity, which also include criteria that make one eligible to become a shareholder in the company. The criteria include the following:

1. Age Requirement

The appropriate minimum age to become a shareholder is age 18. Anyone below the age of 18 is unqualified to own shares in a company.

2. State Government

A firm may have shares owned by the State through the Governor or the Central Government through the President. Any individual may be nominated as a representative by the government.

3. Compliance with the Law

Every individual or company would love to associate with a trusted entity, and they will avoid anyone or corporations with legal issues. To qualify for becoming a shareholder, you have to be a law-abiding human or company. Becoming a shareholder in a company comes with diverse rules and regulations, which you must comply with.

4. Finance

The reason companies sell shares is to gather enough funds. To become a shareholder, you should have adequate funds for investment. The amount of funds required is determined by the market price of shares multiplied by the number of shares you’d like to purchase.

5. Legal qualification

Legal requirements vary by country and the type of industry you operate in. In some countries, shareholders may be asked to obtain a license or permit from the authorities.

Differences Between Shareholders and Investors

Conclusion

Are you looking to invest in private companies in the United Kingdom? Reach out to our professionals at Incorpuk. This article includes what it means to be a shareholder in a company and how to navigate through the process.