What is a shareholder: definition, pros, and cons

Imagine a publicly listed company on the stock exchange. Now imagine that this company is divided into hundreds of little pieces which you can own. This is the case even if you don’t run a company.

These “little pieces” are “shares” and the person who owns them is known as a shareholder.

But looking at this explanation, other questions come to mind. These include what are the responsibilities of a shareholder? And what are the advantages and disadvantages of being one?

What’s more, what’s the difference in the similar-sounding word “stakeholder”?

Let’s take a closer look.

Shareholder: definition

By definition, a shareholder is a legal entity or individual who possesses a minimum of one share of a company’s stock. In simple words, a company’s shareholders are the people who can profit from the success of the business via dividends and stock value. 

However, they’re also individuals who will be impacted by business losses if the company fails. 

A company’s existing shareholders take an active part in the company’s growth, development, and decision-making. They are the key players that vote on things like mergers and acquisitions, electing directors, changing the company’s articles of association, and other vital corporate decisions. 

No matter whether a company makes structural changes, new shares issuing, or goes through exceptional circumstances, shareholders can govern these movements. Naturally, they participate throughout the different stages of the business’ evolution, from company formation to expansion. 

It’s important to note that shareholders are protected from the company’s debts, as their liability is only limited to their investment or share capital (in the context of a limited company).

What do shareholders do?

A shareholder must hold a minimum of one share in a company in order to be considered as one. They purchase this share with their own funds.

Shareholders can be individuals, companies, or even other organisations. Although they are not involved in managing the publicly traded business, they can vote in the directors and management and they have certain responsibilities and duties.

These responsibilities and duties which may involve the following:

• They can be involved in the shared ownership over the short-term and can sell their shares at any time; there’s no requirement for a long-term commitment.
• They enjoy partial ownership of the company.
• They can receive dividends from the company’s profits.
• They are exempt from being sued if the company goes under.
• They can enjoy voting rights regarding the directors of the company who run it and they choose which powers to grant directors.
• They can also take part in appointing and removing directors and setting their salaries
• They may attend shareholders’ meetings.
• View corporate records, inspect premises and receive notice of stockholder meetings.
• In case of insolvency, they must pass a resolution for voluntary liquidation to wind up the company.
• They can also alter the company’s constitution and change the company’s name.

Stockholders can’t invest capital in a sole proprietorship or a sole trader business.

Is there a limit to the number of shareholders?

The minimum number of shareholders in a company is one, while there is no upward cap on the maximum number.

Types of shareholders

Based on the number of shares or the powers entitled by these shares, there are different types of shareholders. 

Understanding the differences between the types of shareholders will enable you to get to know their roles better and understand the dynamics of shareholder rights. 

Whether a business is governed and owned by a single shareholder or a group, each type has a key role in impacting the future of the company. This also extends to the stock market, where shares are exchanged.

Common shareholders

Common shareholders, or ordinary shareholders, are those who possess common stock or ordinary shares in the company. They enjoy voting rights at business meetings and can have a say in decision-making processes. 

They have the right to dividends paid by the business once the preferred shareholders have been given their dividends. 

It’s important to note that common shareholders are at the lowest part of the priority chain. They are last to receive company assets if the business is liquidated. 

Preferred shareholders

On the other hand, preferred shareholders own preferred stock or preference shares. 

Although this type of stock doesn’t provide any voting rights, preferred shareholders are higher up the chain when compared to common shareholders. They get access to dividend payments earlier and in case the business bankrupts – they are with priority in terms of asset distribution. 

Majority shareholders

As the name suggests, a majority shareholder owns a substantial part of the business’ shares. In most cases, their ownership is more than 50%, which puts them in significant control over the company. 

Majority shareholders can influence major business decisions and even elect the board of directors. 

Sometimes, a majority shareholder can be a single shareholder (where the company’s directors deciding on issues is the same person) or a group of individuals acting together for a common purpose. 

Minority shareholders

Minority shareholders, unlike majority shareholders, own less than 50% of the company’s shares. 

They have the ability to vote and be part of general meetings, yet their impact is limited. 

In most companies, protecting minority shareholders is vital, as majority shareholders frequently take control over decisions. 

Institutional shareholders

Institutional shareholders represent entities like mutual funds, pension funds, and insurance companies that possess significant amounts of a business’s stock. 

They can impact business governance and influence strategic decisions as they often come with large shareholdings. 

In most cases, institutional shareholders work in favour of long-term interests. 

Non-voting shareholders

Although not all, some companies issue non-voting shares. These shares don’t grant any voting rights and can be either preferred or common stock. 

They’re usually created to raise capital without compromising control. Just like in the case of other shareholders, non-voting shareholders still have access to dividends and company assets.

What are the pros and cons of being a shareholder?

Being a shareholder comes with a range of advantages and challenges worth considering. 

Below, you can see which are the main ones you need to take into account:

Advantages

As you can probably guess, shareholders enjoy a lot of privileges in a company.

These include but are not limited to the following:

• They can benefit from the appreciation of capital.
• They may receive dividends.
• They may have voting rights on certain matters.
• Shareholders also have limited liability.

Disadvantages 

On the other hand, there are also potential challenges associated with the role “shareholder”.

These can include the following:

• They can face losses.
• Not all companies pay out dividends.
• They may receive nothing if the company faces bankruptcy.
• They have limited rights.

Is a shareholder the same as a director?

No, a shareholder and a director are not the same. 

A shareholder owns shares in a company and votes in the directors. However, they are not responsible for the day-to-day running of the company, whereas a director is.

It is also possible for a director to be a shareholder. This is usually the case with smaller companies where the owner and director are usually the same. 

Shareholder vs. stockholder

Is there a difference between shareholders and stockholders? Actually, the answer is no. 

This is because whether you hold a share in a company or stock in it – this refers to the same concept of company ownership described above. 

Shareholder vs. stakeholder

Although these words may sound similar, they have two completely different meanings. 

A stakeholder in a company can be any person who is affected by it and its activities. This may include employees, government bodies, clients and customers, environmental agencies, and more.

These stakeholders usually have a vested interest in how the company is performing and in its activities to ensure that the company does not cross a legal line. However, a shareholder can also be considered a stakeholder of a company, although not all stakeholders are shareholders.

Conclusion

Now that you know what a shareholder is, what some of their main responsibilities are, and what the pros and cons of being one entail, we hope we’ve given you some business tips into the world of finance, companies, publicly listed companies, and subsequently, their owners.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog in general should not be interpreted as a legal, monetary, tax or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.