What does it mean to be a shareholder?
Being a shareholder gives you partial ownership of a company and with that comes the potential for rewards, as well as rights and risks.
When you buy shares in a company you become a shareholder, which means you are able to participate in and benefit from its future growth.
If a company is successful in growing its earnings and profit over the years then its share price is likely to rise, enabling you to record a capital gain if you decide to sell your shares.
You also have the right to receive dividends, which are portions of a company’s profit that it decides to pay out to shareholders.
Dividends are not guaranteed however, regardless of whether or not the company makes a profit. It is up to a company’s board of directors to decide on how big a dividend to pay, if at all.
The rights of ordinary shareholders
The most commonly issued type of share are ordinary shares, also known as ‘common stock’ in the US.
Every publicly listed company will have ordinary shares within its capital structure.
When a company first lists on a stock exchange and conducts an initial public offering (IPO), it will decide how many shares to sell based on how much the owners want to raise, how much control they’re willing to relinquish and the price investors are willing to pay.
As an ordinary shareholder you are entitled to participate in annual general meetings and vote on:
- The election of the board of directors
- Mergers, acquisitions or asset disposals
- Capital increases
- Director remuneration
Ordinary shareholders may also be entitled to participate in a range of corporate actions, including share buy-backs, when companies buy shares back from investors, and the issue of new shares.
What if the company goes bust?
In the event of a company going into liquidation, ordinary shareholders have a claim on any remaining assets.
However, they sit at the back of the queue, behind all other security holders and lenders, meaning there’s a good chance they’ll get nothing back and lose their entire investment.
This is the biggest risk of being an ordinary shareholder.