What is a shareholder? Definition and types
A shareholder, also known as a stockholder, is a person, corporation, institution or government that owns at least one share in a company. This includes both companies listed in a stock exchange and unlisted ones.
By possessing stocks, a shareholder owns a percentage of that company. The shareholders are the owners of the company – the ones to whom the company is responsible for the business that it performs.
As well as ownership, stockholders have the right to declared dividends, they can vote on who may sit on the board of directors, and have a say in the company’s policy and objectives.
Owners of shares in listed companies also have the right to sell their shares whenever they like.
Shareholders are not personally liable for the company’s obligations and debts – the only money they risk is what they spent when they purchased the shares. This is not the case with partnerships or sole proprietorships.
After the global financial crisis of 2008 and the Great Recession that followed, the governments of many advanced economies bailed out several companies, especially banks, and effectively became shareholders in those businesses.
Two types of shareholders
There are two types of shareholders – those who own common shares (UK/Ireland: ordinary shares) and individuals with preference shares.
Common shareholders: also known as common stockholders, have voting rights and receive dividends if the company makes a profit and the directors decide not to reinvest all of it.
Common stockholders may also be entitled to take part in a range of corporate actions, including share buy-backs (when the company repurchases shares from investors), and the issue of new shares.
Preferred shareholders: also known as preferred stockholders, do not have voting rights. They receive a fixed dividend.
When dividends are paid out, preferred shareholders get their money first, and what is left over is distributed to the common shareholders.
What if a company goes bankrupt?
If a company goes into liquidation, common stockholders have a claim on any remaining assets.
However, preferred stockholders are further in front in the queue, i.e. preferred stockholders are paid first, and common shareholders will get what’s left over.
The largest risk of being a common stockholder is that they are in the back of the queue if the company goes bust.
Many people who are new to investments believe they would be better off starting as preferred shareholders, because it is safer. Experts suggest that what type of stocks novices should buy depends on their financial goals, what their tolerance for risk is, and whether they are interested in having voting rights.
The British government writes the following on its website about shareholders:
“A company limited by shares must have at least one shareholder, which can be a director. There’s no maximum number of shareholders. Shareholders are owners of the company and they have certain rights, e.g. directors may need shareholders to vote and agree changes to the company.”
A majority shareholder has a controlling interest in a company – this means he or she owns more than 50% of the shares outstanding.
Difference between a stockholder and a stakeholder
The terms ‘stockholder’ and ‘stakeholder’ are often mistakenly used with the same meaning. They are quite different.
A stockholder is a shareholder – somebody who owns one or more shares in a company.
A stakeholder is any person, organization or group that is affected by the activities of a business.
Stakeholders include the managers, workers, trade unions, customers, suppliers, creditors, shareholders, and the government (it is interested in collecting taxes, awarding grants, etc.).
The local community is stakeholder – the company provides jobs, if it has factories there could be pollution, smell and noise problems that affect the local community.