A corporation may offer shares through an initial public offering (IPO) because it wants to transition from a private to a public company, raise money for expansion, develop new products and services, or pay off debt. The public can buy those shares through a brokerage firm. Once you’re a shareholder, you have a claim to the company’s earnings and assets, and a right to vote on certain management decisions. For example, in May 2021, the shareholders of Chevron Corporation voted to approve a proposal to reduce emissions from the use of its products.
Types of Shareholders
To understand the types of shareholders there are, you have to start at the two main types of stocks a company may issue: common and preferred. When we discuss shareholders, we are usually referring to those who own common stock versus preferred stock. A common shareholder is what is known as a “residual claimant,” meaning they are the last in line behind creditors, such as banks, bondholders, and preferred shareholders, to receive the income the business generates through dividends. Creditors and preferred shareholders receive a fixed payment from the corporation, so the common shareholders could benefit if the business generates significant profit. If the business does not generate enough cash flow to pay creditors and preferred shareholders, then the common shareholders get nothing. Preferred shareholders, on the other hand, receive a fixed dividend and usually do not have a claim to any additional earnings. Preferred shareholders also do not have corporate voting rights.
Shareholders vs. Bondholders vs. Stakeholders
Shareholders are different from bondholders and stakeholders. Shareholders hold equity in the company, and receive dividends and capital appreciation on their shares only if the business does well and generates sufficient income. Bonds are debt arrangements, and bondholders are lenders. They receive fixed-interest payments from the corporation until their bonds mature and they are paid back. Stakeholders make up a broad group that includes anyone who stands to be affected by the business (employees, investors, etc.). Although stakeholders include creditors and shareholders, stakeholders do not necessarily provide capital to the business and may not receive a payment like shareholders and bondholders.
Pros Explained
Potential for capital appreciation: If a company does well and its share price increases, current shareholders benefit from that price increase because the shares they hold are now worth more. Potential for dividends: Companies often pay dividends, which are distributions of earnings to current shareholders. Often, companies pay dividends in cash but sometimes they offer stock. Limited liability: When you buy shares of a company, you are only at risk for the amount you pay for the shares. This is different from other forms of business ownership such as in a sole proprietorship, in which the owner is liable for the losses incurred by the business.
Cons Explained
A stock’s price may decline: Stock prices don’t always go up. If the stock price drops after the shareholder has purchased it, then the shareholder has lost value. There’s no guarantee the company will pay dividends: Companies are not obligated to pay dividends. They may not produce enough cash to be able to pay a dividend; or the company may decide to keep that cash as retained earnings and reinvest it in the business.
How To Become a Shareholder
To become a shareholder, you simply buy one or more shares of stock in a company. You can do this through a brokerage firm’s app, website, or physical location. Make sure you do your research and due diligence first. If you buy stock, make sure that it is appropriate for you, consider your risk tolerance and investment objectives and how the company measures up to those factors.
