What is a shareholder? Understanding the rights that come with owning stock of a company

• A shareholder is an individual or entity that holds shares or stocks in a company.
• Owning shares or stocks of a company entitles investors to partial ownership of a specific company.
• Shareholders may receive dividends and have limited liability if the company is in hot water.

When you invest in public companies, you purchase shares of the company's stock. Each share of stock you own reflects a small portion of ownership of the company, making you a shareholder.

What is a shareholder?

A shareholder can be an individual or entity - such as a company or organization - that owns stocks in a particular company. If you invest in the stock market, you're already considered a shareholder, or what is also referred to as a stockholder.

Shareholders, as part owners of a company, also have the right to vote in some cases regarding matters of the company and can receive dividend payouts when the company is doing well financially.

"A shareholder is one who owns a share of stock in the company. As long as he or she has that ownership, the shareholder has certain rights and obligations afforded to him or her by law through the corporation's articles of incorporation and bylaws," explains Jenna Lofton, who has an MBA in Finance and is the founder of StockHitter.com. "The rights of a shareholder are many, and include the right to attend shareholders' meetings and vote in proxy elections. A shareholder also has the right to see corporate records, inspect the corporation's premises, receive notice of stockholder meetings, and be paid dividends."

Understanding how shareholders work

Shareholders work by providing money upfront to companies as part of their investment.

You can become a shareholder by investing in a publicly traded company. In exchange for providing capital, shareholders are offered certain rights to vote and make decisions about the company.

While it's possible to invest in private companies to become a shareholder, that process is different as it involves working directly with the company, rather than through the stock market.

A company may already be public and traded on the stock market, or a company may go from private to public with an initial public offering (IPO).

To get started, individuals can invest in company stock through their brokerage account and a brokerage firm by using the company's ticker symbol, which you can find using a search tool.

Companies must file reports with the Securities and Exchange Commission (SEC) to keep shareholders updated on certain matters. For example, annual reports and quarterly reports are filed to share financial information and updates with shareholders.

There may also be additional disclosures about mergers or other important events that affect a company as well as proxy statements. Proxy statements share information about the company as part of the shareholder voting process. You can review many of these documents on the SEC's EDGAR website.

"One of the most important rights of the shareholders is their voting power as it allows them to influence management composition. Shareholders elect the board of directors who manage the company and appoint the company CEO, explains David Clark, lawyer and partner at The Clark Law office. "Their ownership of the company is also protected by law by giving them preemptive rights or the right to purchase company shares before these are offered to the public."

Shareholders have residual rights, which means they're entitled to a portion of a company's profit, even if the company goes under. The SEC states that residual profits must be distributed to shareholders proportionally, based on their percentage of ownership through shares.

"Shareholders do not actually manage the corporation. However, the law gives them the responsibility of making sure that the company is well-managed through their voting powers, power to declare dividends, and approval of the company's financial statements," says Clark. "In case of insolvency, they have the responsibility to pass a resolution for voluntary liquidation to wind up the company's operations."

Shareholder rights

Shareholders of a company are entitled to certain rights as well.

Economic rights. Shareholders invest in companies to get returns on their investment through economic gains. Shareholders are entitled to profits of a company that they invest in through dividend payments or being able to sell stock at will. Additionally, if a company goes under, shareholders are entitled to net proceeds of the company after it's dissolved according to Delaware Code § 281(a).

Control rights. Shareholders have the right to vote on matters that relate to the business, including electing directors, which offers some control and influence without actually managing the business itself. Shareholders will also typically receive proxy statements via email from their broker. If a shareholder doesn't vote, brokers still may be able to vote on their behalf by something called uninstructed voting - but only on routine matters. But in light of new legislation passed in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act, limits were placed on this type of voting requiring the New York Stock Exchange (NYSE) and Nasdaq to prohibit voting executive compensation as well as electing board members.

Information rights. Shareholders are entitled to some information about the company you invest in when you're a shareholder. For example, you may be entitled to financial statements. Investors may also receive information on board meeting minutes and inspect articles of incorporation if requested in writing with five day's advance notice. It's possible to review a list of shareholders as well as basic documents such as the charter and bylaws. To receive additional information when it comes to inspecting articles of incorporation or the books, investors must show that their request is legitimate and with a purpose.

Litigation rights. Shareholders have the right to sue the corporation if there are wrongdoings from its directors that aren't in line with their fiduciary duty. Though investors can't sue for just any reason, if there are violations it's possible to sue with a direct lawsuit or a derivative lawsuit.

"The Corporation Law grants common shareholders the right of ownership, power to vote, right to dividends, right to transfer ownership, right to sue, and right to inspect documents of the corporation," explains Clark. "Preferred shareholders have priority rights when it comes to the distribution of profits as against the common shareholders, so they are entitled to fixed dividend rates. However, they do not enjoy the right to vote over executive decisions."

Quick tip: If voting is important to you as a shareholder, you may be able to attend a meeting in-person. You can also vote online, by phone, or mail. Watch out for notices from your broker about proxy statements.

Types of shareholders

When you invest in a stock, you become a shareholder or stockholder - the terms refer to the same thing, which is owning a portion of the company through shares of stock. The two basic types of shareholders are:

1. Common shareholders. This type of shareholder owns part of a company through common stock and has voting rights as well as potential dividend payments.

2. Preferred shareholders. This type of shareholder doesn't have the same voting rights and is more rare. A major difference is that they have priority over dividend payments over common shareholders.

Note: There are also majority and minority shareholders. A shareholder who owns and controls more than 50% of a company's shares is a majority shareholder, while those who hold less than 50% are classified as minority shareholders.

Shareholders vs. bondholders vs. stakeholders

There are some differences between shareholders, bondholders, and stakeholders to be aware of.

• Shareholders own a portion of a company by investing in their stocks and are sometimes referred to as a stockholder - because you hold stock.
• Bondholders can buy corporate bonds to lend money to a company and in return get interest on the investment. As the bond matures, you'll be repaid your principal investment. Unlike a shareholder, you don't own a portion of the company and are only eligible to receive interest on the bond as well as your principal.
• Stakeholders is a term that refers to a larger group of people that have an interest in a company's outcomes. Stakeholders can include employees, shareholders, customers, and more. Stakeholders can mean anyone who has a stake in the company, which is different from a shareholder who specifically owns shares of the company.

Quick tip: Whether you invest in stocks or bonds or both, make sure you understand the pros and cons of each and how your risk tolerance plays into how much you're willing to invest in each.

The financial takeaway

As a shareholder, it's possible to own shares - or portions of ownership - of a public company. You can become a shareholder or might be one already if you invest in the stock market. As with anything in the stock market, there is the potential for great reward but also great risk that can come with losses.

You may have certain rights that you can take advantage of as well, such as voting, and potentially have access to dividend payments. To help you manage as a shareholder, it's always a good idea to check out reports from the SEC to see how a company is doing so that you can be an informed investor.