In part one of my primer course on stocks, I let you know that businesses divide stocks into shares, and that each share represents a fraction of ownership. I told you that shares may come with different ownership rules, privileges, or share values. I also told you about the two forms of stock: common stock and preferred stock. Now we’ll talk about shareholders.
A shareholder is a person or company that legally owns one or more shares of stock in a joint stock company. Shareholders get special privileges that depend on the class of the stock. There are a number of privileges that can come with stock that include: the right to have a vote on things like elections to the board of directors, the right to share in distributions of the company’s income, the right to buy more shares that are issued by the company, and the right to a company’s assets when a company liquidates. Directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders.
The owners of a business might sell more shares to build further capital for investing in new projects for the business, or to reduce their holding so they have more capital freed for their own private use. When you purchase a share you are literally sharing in the ownership of the company, a portion of the decision making power, and potentially, a portion of the profits.
Due to the fact that there could be thousands of potential shareholders in a large publicly traded corporation, shareholders will utilize their shares as votes in the election of members of the board of directors of the company.
Usually, each share equals one vote. Corporations might issue different classes of shares though, which may have different voting rights. Because shares are proportional to votes, owning the majority of the shares allows other shareholders to be out voted, which is how original owners of a large company will often still have control of the business. To Be Continued In Part Three.
Mallory Megan works for Rapid Recovery Solution and writes articles about commercial collection agencies. Free reprint avaialable from: Stocks 101 Part Two.
