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SHAREHOLDER

 

SHAREHOLDER

A person who legally owns one or more shares of stock in a public or a private corporation. A shareholder can be an individual or an institution. In layman terms a shareholder is the owner of the company.

The number of shares he/she holds defines his/her percentage of ownership of the company. The law defines the shareholder only after his/her name or the entity’s name (in case of institution) is mentioned in the company’s register of shareholder or members. Shareholders of a company or the corporation are legally separate from the corporation itself and thus are not liable for the corporation’s liability. Until and unless the shareholder has offered guarantee, he/she has limited liability to the unpaid share price underlying.

Shareholder can acquire share either from primary market (during the IPO of the company) and thus provide the capital for the corporation or from the secondary market. Shareholders are considered to be the subset of stakeholders of the company which has direct or indirect interest in the business entity like customers, suppliers, employees and the community.

Roles of a shareholder

·       Discuss, decide and vote for the directors of the company.

·       Decide on the directors’ salary. This has to be appropriate in order to compensate for the expenses and cost of living in the city where the director lives without being able to compensate for the company’s offers.

·       Making decisions on the areas where directors have no power including making changes at company constitution level.

·       Checking and making approvals of the financial statements of the company as and when they are reporting as per company Act norms.

·       Deciding on the dividend pay-out percentage and make sure the dividends are paid out.

·       Brainstorm, vote and decide on any organisational decision (strategy, merger, acquisition, liquidation and etc..)

Types of shareholders- There are two types of shareholder, namely

1.      Common shareholder: A person or an institution who owns common shares or ordinary share of a company is known as common shareholder.

2.      Preferred shareholder: A person or an institution who owns a preferred share of a company is known as preferred shareholder. In terms of liability from company’s perspective the preferred shares are seniors to common shares and juniors to debt and bonds.

Both common and preferred shareholders get paid the agreed dividends from the company on the decided date. The preferred shareholders get paid before the common shareholders and after the company has paid all of its debt holders and vendors.

 

Rights of the shareholder- shareholders are granted six rights by its nature and are listed below

1.      Voting power- Shareholder has the right to vote for the corporate decisions concerned and limited to the company

2.      Partial ownership of firm- Shareholder owns part of the company proportional to the number of shares in the name of holder

3.      Right to transfer ownership- Shareholder has the right to transfer his shares to any person or institution under certain conditions.

4.      Right to receive dividends- He/she has the right and entitled to receive the decided amount in company’s AGM (Annual General body Meeting) as dividend for the shares held by shareholder.

5.      Right to inspect corporate documents- Under company’s act, a firm is liable to report and file its financials. All of its shareholders are entitled to inspect any of these corporate documents on any occasion without any particular reason.

6.      Right to sue the concerned for wrongful acts- A shareholder can file lawsuit, if he/she comes across any wrongful action by the company in terms of ethics, discrimination, fraud and etc.

Importance of shareholder

Shareholders of a company has the right to vote and elect the director of the firm. These director in turn appoint and supervise senior executive and officers including CFOs, COO and CEO. Thus shareholders influence the firm’s operations directly. Shareholders can trade the shares they hold in share markets for money, pledge to raise money. The supply and demand of any particular’s company’s shares in market define, fluctuate and decide it’s the share price, Thus shareholders indirectly influence the share price of a stock in a market. Shareholder invest money as capital in company and expect returns when company makes profits, so the shareholders are one of the important stakeholders of the company or corporation.

If a company liquidates, creditors are first in line to receive their debts. Next comes the bondholders who hold bonds of the company. Common shareholders are next and last in line to receive to have their debts paid in case of company’ liquidation. As shareholder are the most important stakeholder and participate in the management of the company.

Difference between shareholder and stakeholder

·       All Shareholder are no doubt the stakeholders in fact vital stakeholders of that particular company but the reverse is not true, that is all stakeholders need not be shareholders (vendors, customers and employees are not shareholders.

·       Stakeholders are not owners of the company but shareholders are the owners of the company. Number of shares decide their percentage of ownership.

·       Stakeholders do not have voting rights

·       Stakeholders do not get paid the dividends whereas shareholders get paid for dividends as decided in the general body meetings.

·       Shareholders are last in line to receive liability when company files for bankruptcy where stakeholders receive their debt as per their rank in order (Employees, vendors, creditors and bonds holders)

Disadvantages of being a shareholder

·       Volatility- The price of stock traded in markets can be fluctuating and shareholders bears the risk of volatility.

·       Dividends- There is no fixed dividend percentage or compulsion for the companies to pay the dividends.

·       Financial performance- Shareholders returns is solely decided by profitability and its financial performance.

·       Bankruptcy- Shareholders are last in line to receive their debt in case if company goes bankruptcy and files for liquidation.

 

Conclusion

Shareholder and the director are two different entities, however a shareholder of a company can become the director of the same firm, provided he/she receives the board approval. Preferred shared holders do not have any voting rights within the company. Common shareholders have the right to influence decisions concerning the company and have the option to file any lawsuit in case of any company’s illegal action or wrong doing. This can also be any unethical practice, violating company norms, not meeting audit requirement, tax fraud, discrimination and etc. To sum it up shareholders are the owner  of the firm and the percentage of their ownership depends on the number of shares they hold against the total number of shares made available by the company.

 

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