What is a Shareholder?

Saving for retirement seems unnecessary during one’s youth, but that’s when one should build their nest egg. The more time you give your money, the more it has the opportunity to grow. And, investing in shares is a good way to achieve such growth. Of course, it is important to remember that the stock market is a high-risk market. So, it is best to invest in equity only after learning more about the market and your risk appetite. Here’s a brief introduction.

Definition of a Shareholder

According to Investopedia, “A shareholder is any person, company, or institution that owns at least one share of a company’s stock.” Shareholders are part owners of the company whose shares they own, reaping benefits in the form of dividends or increased value of the stock. On the other hand, if the company sinks, the shares will too. Shareholders are entitled to some rights and roles, depending on the type of shares they own and the constitution of the specific company.

Types of Shareholders

There are basically two types of shareholders.

1.      Common Shareholders

These are the most prevalent type of shareholders, who own common stock of a firm. They have voting rights in decision making processes of the firm. They receive any common dividend declared by the top management of the company and also have rights over assets of the company, if it is ever liquidated.

They also have the right to file a lawsuit against the company, if there is any decision or action taken that will harm the company and the price of the shares. This empowers them to exercise some degree of control over the management and strategies adopted by the company.

2.      Preferred Stockholders

This type of shareholder owns shares known as preferred stock. They have no voting rights, which means they don’t have any control over the management and decision making of the company. However, they do have a guaranteed right of being paid a fixed amount in dividend every year by the company, even before the common stockholders or even in times of distress. It is more like a debt on the company.

Both types of shareholders profit during times when the company performs well. But, common shareholder investments experience greater fluctuations, meaning both higher gains and higher losses than preferred shareholder. Investors looking for stable income choose preferred stock.

Rights of Shareholders

Rights of shareholders vary from company to company and are defined in its bylaws and charter. Some of the most common rights include the right to:

  • Examine the company’s records and books
  • File a lawsuit against the company for misconduct of the management.
  • Vote (common shareholders only) in major decisions, such as selection of board of directors and whether a suggested acquisition and merger should occur.
  • Money generated if a company dissolves its assets. Preferred stockholders, bond owners, creditors have the upper hand in rights over this than common shareholder.
  • Receive a share of dividend declared by the company.
  • Attend the annual meeting of the company in person or via video conferencing call to assess performance.

Common shareholders can exercise their right to vote in a meeting by proxy via email or conference call, if they can’t attend the meeting in person.

Why Invest in Shares

  • Shares tend to offer higher potential for growth than other investment vehicles in the long term, after regular rise and fall in the prices of the market.
  • Easier to make it through downward market movement. If you own shares for the long term, the decline will make you skeptical about the investment for the time being. It might take time, but the market has always recovered and provided the best potential for growth in the long term.
  • You don’t have to invest everything you own in stocks. Investment should be based on your risk appetite, time frame of investment and financial conditions.

Tips for Investing in Shares

Looking at the overall performance of the company is necessary before investing in its stock. Here’s a look at some other things that need to be considered before investing:

1.      Management

Like a pilot of an airplane, the management of a company can help it tide over unfavourable conditions or could lead it to losses under stable conditions. So, it is important to know who’s on board and their past experience. Ask questions like whether the success of the company is dependent on the current management and can the company do better without this team.

2.      Business Model

The business model is the strategy used by a company to maximise its return on investment. While there is no single perfect strategy, you should understand the company’s business model. Also, consider how it will perform during times of economic boom and recession.

3.      Revenue

This is the amount of money a company earns from the sales of its products or services. If you see a track record of rising revenue over the past few years, you can consider the company’s shares for investment. However, it is unrealistic to expect a company to continue to increase its sales and revenue every year.

4.      Competitive Advantage

Competitive advantage is when a company has an advantage over its competitors via its patents, brand power, technology, superior products, etc. It is like a wall that prevents competitors from conquering its share of market, thereby maintaining its profits and proving to be a better investment in the long term.

5.      Profit Margin

This is the percentage of revenue a company earns as profit, after accounting for all its expenses. A stable or growing profit margin signals that the company will generate profits and reward its shareholders.

6.      Debt-to-Equity Ratio

This signifies how much debt a company has, when compared to its equity. It examines whether a company can repay its debt or whether it is likely to run into financial problems. The lower the ratio, the better will be the company for investment.

7.      Net Income

Growing net income indicates that the company knows how to keep its products and services in demand in the market, with control over operational costs as well.

8.      Price to Earnings Ratio

This helps determine whether a stock is overpriced. It compares the price of the stock to the amount of profit generated per share. A low price to earnings ratio means that the stock is trading at a reasonable or even bargain price, and you are not overpaying for it.

While nothing can guarantee success in the financial markets, a disciplined and well planned approach offers you greater potential for success in stock investments.

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