Investors with a risk-taking attitude are drawn today towards equity trading, given the traction it has gained in recent years due to its substantial return-giving quality. For equity trading, one needs to be a shareholder of the stocks of a company.
The possession of stock is the reason why the word Shareholders is synonymous with Stockholders.
However, the question is, what does shareholder mean in the investing world?
Are all types of shareholders similar?
Do they have equal rights?
To answer the above questions, we need to take you through shareholders’ meaning and its fundamentals.
So, without any further ado, let us dive right in.
Shareholder refers to a person, company, or organisation holding the stocks(s) in a company.
They have certain privileges like a shareholder must own a minimum number of shares, making them a partial owner of the company. Shareholders generally receive dividends if the company is earning profits. Shareholders must have the right to vote in meetings as they are partial owners of the company and have the right to elect the board of directors.
Further, shareholders are investors who are also the company owners for the part of their shareholding; thus, at the time of liquidation, the company shareholders receive their portion of liquidation proceeds after paying off all the creditors.
The liability of shareholders is only limited to the percentage of their shareholding, which means that creditors and other debt holders cannot force shareholders to be obligated to pay the debts off.
Shareholding determines the ownership and control of a company, and each shareholder is a partial owner of the company. Still, the company’s power lies with shareholders holding more than 50% shares of the company, known as majority shareholders.
The shareholders holding less than 50% of shares are known as minority shareholders. In most companies, the majority shareholders are the founders or promoters of the company, as they keep majority shares to themselves to hold power to control the company.
At the time of voting for any decision in the company’s meeting, the decision is made if the majority of shareholders vote in favour. Thus, majority shareholders play a crucial role in the company’s decision-making. In short, the shareholders can vote as per their shareholding in the company.
The vital aspect of majority shareholding is that while the majority shareholders play a crucial part in the company’s critical decision-making, they have limited liability up to their holding, unlike partnerships or proprietorships.
Shareholders are partial owners of the company; they enjoy several rights in the company, which are as follows:
Shareholders do vote in general meetings of the company to make various decisions; thus, shareholders are the company’s key decision-makers.
Shareholders make decisions like the appointment of the Board of directors, approval of financial transactions, etc.
Shareholders have the right to receive declared dividends. One should note that a company does not need to declare dividends mandatorily every year.
But, when a company declares dividends, it is the shareholder’s right to receive the same.
Shareholders have the right to visit the company and look through its books and records of the company.
Shareholders have a right to receive notice of each general meeting of the company to be held during the year and have the right to attend the same.
Shareholders can also sue the company in case of misconduct by the company’s officers or management.
By passing a special resolution, shareholders may also request an investigation into the matter of the company if they think that the company is operating prejudicially to the interest of shareholders.
Shareholders are entitled to residual rights on the proceeds in case of liquidation of the company.
If any shareholder cannot personally attend the meeting, they have the right to appoint a proxy on their behalf to attain and vote in the discussion.
Being a shareholder is not only about receiving the dividends and voting in the general meetings, and making decisions as per their want. Shareholders have specific roles to play in the company, and the following are some roles of shareholders:
It is the shareholder’s responsibility to appoint the company’s directors, and the shareholders should nominate directors in the company’s general meeting. The shareholders have to put a lot of thinking before appointing the directors as directors are the one who runs the business of the company.
It is the shareholders’ responsibility to ensure that the directors are performing their duties as expected. The shareholders can remove any director if necessary to do so in the interest of the company.
The shareholders’ responsibility is to decide the director’s remuneration in the general meetings. Shareholders have to see that the remuneration is as per the Companies Act’s limits and satisfactory to the directors.
Certain decisions stated in the Companies Act are exclusive only for shareholders to make in the company’s general meetings. The shareholders have a responsibility to make such decisions rationally.
The shareholders have a responsibility to approve the company’s audited financial statements in the company’s general meeting.
There are generally two types of shareholders, viz. Common shareholders (Equity shareholders) and Preference shareholders.
Common shareholders are the partial owners of the company. They are holders of the company’s common shares, which gives them the right to vote in the company’s general meetings.
As the common shareholders are owners of the company, they can sue the company for any wrongdoing that can be detrimental to the company’s business.
Common shareholders are commonly recognised as the equity shareholders of the company.
As the name suggests, Preference shareholders are given preference over the common shareholders at the time of profit distribution of the company.
The Preference Shareholders have no right to vote in the company’s general meetings. Still, they have a right to receive a fixed rate of dividend even if the company has incurred losses during the financial year.
Convertible Preference shares: Preference shares can be converted into common shares after a certain period and are called convertible preference shares.
Non-Convertible Preference shares: Preference shares that do not get converted into common shares during their life are called non-convertible preference shares.
Redeemable preference shares: Preference shares redeemed by the company after the expiry of the time mentioned during the issue of such shares are called redeemable preference shares.
Non-redeemable preference shares: Preference shares that are not redeemable in the future are called non-redeemable preference shares.
Participating preference shares: Preference shares with the right to participate in the profits after paying off all the interests and dividends are called participating preference shares.
Non-Participating preference shares: Preference shares with no right to participate in the profits after paying off all the interests and dividends.
Cumulative preference shares: Preference shares with the right to receive the unpaid dividend in the future years are called cumulative preference shares. If not paid in the current year, the unpaid dividends accumulate for these shares.
These shares have the right not to receive dividends if the same is not received in the current year.
Every company needs shareholders. Here are some reasons specifying why a company needs shareholders for:
The company’s shareholders vote in the critical decision-making of the company and appoint the key management and directors of the company, thus influencing the operations of the company.
Shareholders also create pressure on the company to perform better as investors only tend to invest in companies doing good operationally. Thus, the shareholders put the company under constant pressure to meet operating targets.
Shareholders are the investors in the company. Shareholders become shareholders by investing in shares of the company. This is how the companies receive financing from shareholders by providing company ownership in exchange for capital.
The Board of directors of the company is required to ensure full disclosure to the company’s shareholders regarding the business conditions and operations. Many companies spend a reasonable period in each quarter discussing matters relating to the company’s business.
There are differences between common shareholders and preference shareholders.
But, the significant criteria are voting rights and dividend payout methodology. However, that is just the tip of the iceberg.
An all-encompassing comparison chart will help you understand the difference between Common shareholders and Preference shareholders.
Serial No. | Basis | Common Shareholders | Preference Shareholders |
1. | Definition | Common shareholders enjoy certificates of ownership in the company, held by them in exchange for the capital provided. | Preference shareholders are capital providers that enjoy preference over other common shareholders for claims over the company’s profits and assets. |
2. | Types of Return | Common shareholders enjoy substantial returns in the form of capital appreciation. | Preference shareholders enjoy steady dividend payouts. |
3. | Dividend payout | Common shareholders receive dividends after dividend payments of preference shareholders. | Preference shareholders receive dividends before any other shareholders. |
4. | Amount of Dividend | The amount of dividend received by an equity shareholder is determined by the company’s profits. | Preference shareholders receive dividends at a fixed rate pre-determined by the company. |
5. | Eligibility for Bonus Shares | Common shareholders are eligible to receive bonus shares against their existing shareholdings. | Preference shareholders are not eligible to receive bonus shares. |
6. | Repayment of capital | Common shareholders are paid at the end of the company’s liquidation process. | During the company’s winding up or liquidation process, preference shareholders are paid before the other existing shareholders. |
7. | Voting rights | Common shareholders enjoy a say and exclusive voting rights in the company. | Preference shareholders do not have any say and voting rights in the company. |
8. | Say in management decisions | Common shareholders have a say in the critical matters of the company and can participate in management decisions because of their exclusive voting rights. These shareholders are allowed to interfere in the company’s managerial decisions to the extent of their ownership. | Preference shareholders do not have any right to interfere in the company’s managerial decisions. They do not get any say in the critical matters of the company due to a lack of voting rights. |
9. | Redemption | Common Shareholders cannot redeem their shares as they are the long term financial resources of the company. | Preference shareholders have shares that are redeemable depending on the type of their redemption. |
10. | Convertibility | The shares held by Equity shareholders are not allowed to be converted into any other type of shares. | Preference shareholders can convert to common shareholders if they have convertible preference shares. |
11. | Outstanding Dividends | If the company has not paid a dividend in the previous years, they are not obliged to pay outstanding compensation to the Common shareholders. | If the company has not paid a dividend in the previous years, they are obliged to pay outstanding dividends to the preference shareholders who hold cumulative preference shares. |
12. | Capitalisation | There are high chances of capitalisation for shares held by common shareholders. | There are low chances of capitalisation for shares held by preference shareholders. |
13. | Types of shares | The various types of shares held by common shareholders are as follows:
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The various types of shares held by Preference Shareholders are as follows:
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14. | Term of financing | The shares held by common shareholders are a source of long-term financing. | The shares held by preference shareholders are a source of medium to long-term financing. |
15. | Investment | The investment cost for common shareholders is low. | The investment cost for preference shareholders is comparatively higher than common shareholders. |
16. | Investor attitude. | Common Shareholders are investors with a high-risk appetite. | Preference shareholders are investors with a low-risk appetite. |
17. | Obligation for dividend payment | A company is not obliged to pay dividends to its common shareholders. | A company is obligated to pay dividends to its preference shareholders. |
18. | Liquidity | Common shareholders have stocks that are highly liquid and experience quick trading on the stock market. | Preference shareholders have stocks that are not liquid, but the company can buy back them. |
19. | Insolvency proceeds | During the insolvency of a firm, common shareholders are paid after full repayment to preference shareholders. | During insolvency of a firm, preference shareholders are paid before common shareholders, and they also have a preferential claim over the company’s assets. |
20. | Liquidation | Common shareholders are paid after payment to creditors and preference shareholders during liquidation. | Preference shareholders are paid after payment to creditors but before common shareholders during liquidation. |
People often use the words shareholders and stakeholders interchangeably as they think both are the same. However, these two do not mean the same thing. Shareholders are the entities investing their money in company shares and are partial owners of the company.
At the same time, the stakeholder includes each entity interested in the company like the government, debenture holders, employees, etc. Stakeholders do not mandatorily own a part of the company.
As stated earlier, stakeholders are anyone interested in the company’s financial performance. Thus, stakeholders include shareholders.
Stakeholders include even the employees as employees are interested in the company’s financial performance because, with the company’s growth, the pay and incentives to the employees tend to increase.
Thus, stakeholders are a more comprehensive term than shareholders.
A shareholder is part owner of the company, while the director is the individual appointed by shareholders to run the business of the company. The Shareholder and the director are thus two different entities, though an individual can be a shareholder and a director simultaneously.
Being part-owners of the company, a shareholder has the right to receive the dividends and part of the profit.
On the other hand, directors have the right to receive the remuneration decided by the shareholders in general meetings of the company. A person can be a shareholder and a director simultaneously if they get appointed director in a public meeting.
Further, it should be noted that a shareholder holding shares more than the amount specified in the Companies Act cannot be appointed as an independent director.
There is no such restriction in the case of an ordinary director.
In a nutshell, shareholders are the partial owners of a company with exclusive voting rights and profit shares. The liability of the shareholders is only limited to the investment made by them.
Further, with the renowned fame of equity trading among intelligent investors, being a shareholder seems to be a wise decision.
Companies' capital investment is divided into small portions, and each such portion is known as a share. Shareholders are investors who invest in shares and thus are the capital contributor to the company. The capital contributed by shareholders is used for the growth and expansion of the company, and this contribution makes them part owners of the company.
Issuing dividends to common shareholders is solely the company's decision. But, once the company has decided to issue dividends to the common shareholders, it needs to have a favourable vote from the majority of the shareholders.
However, the ordinary shareholders cannot interfere in the other decisions like issuing dividends to preference shareholders.
Each common shareholder has the right to vote in the company's general meetings, and the votes are counted based on the number of shares held by the shareholder. For example, if Mr A holds 20 per cent shares of the company, his voting power is 20 per cent.
Similarly, if Mr B holds 40 per cent shares of the company, his voting power is 40 per cent.
Hence, one vote of Mr B equals two votes of Mr A.
Many people think that one shareholder equals one vote, but that is not true.
Shareholders have limited liability and are liable for the part up to their investment.
Shareholders can only lose up to their investment amount, and their assets cannot be attached any further.
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