What is the Meaning of a Shareholder?

Investing is not all about delving into complex strategies and in-depth analysis. It also involves getting to know the absolute basics of the market and its participants. Among the many participants in the financial markets are shareholders.  You may be familiar with the meaning of a shareholder. 

However, do you know the rights that shareholders have and the details of how shareholding works? If you want the answers to these questions and more, you’ll find them in this article. Let’s start with the basics. 

What is a Shareholder?

The meaning of a shareholder is quite straightforward. It refers to any individual or institutional investor who holds at least one share of a company. Some countries also allow partial or fractional share ownership. A share, in this context, is one unit of the company’s total equity capital. 

Since shareholders own a part of the company, no matter how small, they are entitled to the company’s profits. Many companies reinvest their profits in the business for further growth. Some, however, may distribute a part of their profits as dividends to their shareholders. Furthermore, shareholders also possess many rights by virtue of their stock holdings.

These investors can earn from their shareholdings in two ways — dividends and capital appreciation. Capital appreciation occurs if the share price of the company appreciates over time, leading to profits for the company’s shareholders. 

Basics of How Stockholding Works

To further understand the meaning of a shareholder and what they are entitled to, let us delve a little deeper into how stockholding works. Holdings are typically expressed in terms of percentages. For instance, say a company has 10,00,000 outstanding shares and you hold 1,000 shares in that company. This means you hold 0.1% of the entity’s stock as a shareholder. 

Any investor with less than a 50% stake in a company is considered a minority shareholder. Most retail investors only have minority holdings due to capital constraints. Conversely, investors who hold 50% or more shares in a company are majority shareholders. Typically, these investors include the company’s founders, promoters, venture capitalists (VCs) and other such top investors. Often, these parties may not hold over 50% of the company’s equity. Instead, they may hold a substantial share, although it may be less than half. 

That said, every equity shareholder, whether they hold a majority or a minority stake, is entitled to several shareholders’ rights, as you’ll see in the following section. 

Rights of Shareholders

Any retail or institutional investor with equity shareholdings in a company is eligible for the following shareholders’ rights. 

• Right to Receive Dividends

Shareholders are entitled to receive a part of the profits earned by a company in the form of dividends — if and when the company’s board of directors declare such payouts. That said, you must keep in mind that these dividend payouts are not guaranteed. Equity shareholders have the right to receive them only when the company declares such dividends. 

• Voting Rights 

Shareholders with ownership in a company’s equity also have the right to vote on major decisions of the company, like offering approval for the issue of any new shares or securities, electing the members of the company’s board and even going ahead with an acquisition or merger. This right can be exercised in the company’s annual general meeting. The extent of voting rights is proportional to the investor’s shareholdings. 

• Right to Information

Shareholders also have the right to access important information about the company, including financial statements, annual reports and other relevant documents. This transparency allows them to make informed decisions about their investments and hold the management accountable. Companies are also required to disclose certain information to shareholders regularly and upon request.

• Right to Proceeds in Case of Liquidation

In the event of the company’s liquidation, anyone with equity shares is also entitled to the proceeds recovered as a part of the liquidity procedures. However, equity shareholders may only receive their share after the company’s creditors and preference shareholders are paid out.

• Right to Sue for Wrongful Acts

Another important kind of shareholders’ rights is that they are entitled to take legal action against the company, its directors or officers. This can be done if a shareholder believes their rights have been violated or if there has been misconduct that has harmed the company. Some examples of such scenarios include filing class action lawsuits to protect shareholder interests.

Types of Shareholders

Depending on the type of shares they hold, investors can be classified as common/equity shareholders and preference shareholders. Here’s what these terms mean:

• Equity Shareholders

These shareholders own a part of the company’s common stock or equity stock. Such stocks give these investors the right to vote and receive dividends. However, their priority in case of liquidation is lower than preference shareholders. 

• Preference Shareholders

Preference shareholders own a part of the preferred stock issued by a company. These shares carry the advantage of priority in terms of distributing liquidation proceeds and other payouts. However, preference shares do not offer shareholders the right to vote. 

Conclusion

This sums up the meaning of a shareholder and what such investors are entitled to. If you plan to become a shareholder of a company by investing in its shares, you must verify the company’s fundamentals and financial health. Motilal Oswal’s Research 360 platform can be a game changer in this regard. 

This comprehensive research platform allows you to perform in-depth fundamental analysis, sector analysis as well as industry analysis. With these insights, you can effectively evaluate whether a company is a good investment for the long term.