During an economic downturn, as a shareholder, you would expect:

The company to make less profit

During the most recent financial year and the company's profits almost doubled. Therefore, you would expect:

The company's share price to increase

Buying ordinary shares is:

Risky because preferred shareholders will be paid before ordinary shareholders.

Shareholder: Definition, Meaning, Types & Examples

- Jack Ma

Shareholders are key stakeholders in a business. They are the ones who invest in businesses and provide funds for businesses to grow. However, being a shareholder can also be risky - let's find out why.

What is a shareholder?

Companies can sell shares to raise funds for their business and operations. All incorporated companies can sell shares. Private limited companies can decide who they sell shares to and public limited companies can sell their shares freely.

Each company is owned by its shareholders. Every shareholder holds a certain amount of a company’s shares. The more shares a shareholder owns, the more of that company belongs to them. Shareholders can either be individual investors, or other limited liability companies and organisations. These individuals or organisations purchase shares to make a profit through dividends.

Dividends are a part of the company's profits which they pay to shareholders depending on the number of shares they own. The more shares you own in a company, the more of the company's profits you will receive in the form of dividends.

Shares can also be traded. You could buy a share in a company, receive dividend payments, and later on sell the same share you bought previously for a higher price. The price of your share is dependent on how well the company is doing financially.

Shareholders' agreement

A shareholders' agreement is an agreement among shareholders or the members of a company.

A shareholders' agreement explains all the different terms and conditions a shareholder can expect when buying and owning shares in a company.

The shareholders' agreement explains the different processes, outcomes, and rights shareholders have within the company. Typically, a shareholders' agreement consists of:

The shareholders' rights and obligations.
How the sale of shares is regulated within the company.
How the company will pay dividends.
How the company will plan on growing in the future.
Describes the management of the company or how the company is going to be run.
Describes how decisions are made and how they will be made in the future.
Describes how the company is going to raise funds.

Shareholder implications

Shareholders can influence the decision-making process of a company. Most types of shares, especially if you own a lot of them, will grant you decision-making rights in a company. This decision-making right is called the shareholder's voting rights. By buying more shares, you will have more influence over the outcome of the decision.

Let's say each share is worth one vote and the company is made up of 100 shares. If you purchase one share, it means you get one vote on a certain decision the firm is going to make. However, if you buy twenty shares in the company, you have 20 percent of the decision-making power. By buying more shares, you will have more influence over the outcome of the decision. If you were to own 51 or more percent of the shares in the company, you would control the business. Typically, individuals do not own significant percentages of large public companies.

There is a difference between shareholders and stakeholders. Every shareholder in a company is a stakeholder. However, not all stakeholders are shareholders.

Advantages and disadvantages of being a shareholder

As we know, setting up a company can be risky. In the same way, buying shares in a company comes with its own sets of risks. However, buying shares and investing in a company, when done correctly, can be a very rewarding process.

Advantages of shareholders

Shareholders usually invest in a business for monetary purposes. This means that you buy shares in a company, and hopefully, the company makes a lot of profit that they can pay you in the form of dividends. The more profit the company makes, the more you will likely receive dividend payments.

Another advantage of buying shares is to trade these shares. Some shareholders invest in hopes of making large returns. One of the ways in which a shareholder could do this is by buying shares at a lower price point and later on selling them at a higher price. Usually, riskier companies will offer higher returns.

Disadvantages of shareholders

There is always a risk that comes with buying shares. If the company makes bad financial decisions or hires managers and executives that are not aligned with the mission of the company, the price of its shares will fall.

There are also external influences, like the economy as a whole, that could impact a company's share prices. For instance, during a financial crisis, no matter how well a company is being managed, share prices will most likely decrease. Because of a negative economic climate, companies are also likely to make lower profits than expected. As a result, the dividends shareholders receive will also be lower than expected.

Shareholder - Key takeaways

Each company is owned by shareholders. The more shares an individual or organisation holds in a company, the higher their influence on the decision-making process of the company.
Shareholders are paid dividends. The amount of the dividend payment depends on the profitability of the company.
The advantages of buying shares include the receipt of dividends and the returns you can get from trading shares.
Buying shares can be risky. If a company does not perform well share prices can decrease.
If a company is not as profitable as expected, shareholders will receive small dividend payments.

Frequently Asked Questions about Shareholder

what is shareholders' equity?

Equity is the final amount paid to the shareholder at any given time if a company sells its assets and clears its debt.

Is a shareholder also an owner?

Yes, a shareholder is also an owner. Every shareholder holds a certain amount of a company’s shares. The more shares a shareholder owns, the more of that company belongs to them.

what is a shareholder?

A person or a group of people, or any other type of organisation who owns a certain percentage of a company's shares is called a shareholder.

How to become a shareholder?

To become a shareholder of any company, a legal person must buy or inherit shares of that company.

Can a shareholder start a competing company?

A minor shareholder of a public company can start a competing company. But it may not be fruitful for a major shareholder of a private company to start a competing company.

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Shareholder

StudySmarter Editorial Team

What is a shareholder?

Shareholders' agreement

Shareholder implications