What are Shareholders and How Do They Earn Money? A shareholder is someone who owns at least one share of a particular company. They may also be referred to as stockholders or stakeholders, as they own stock or have a stake in the organisation. Often, company owners will own all of the shares or stock of their business if the enterprise is a private limited company. In contrast, a public limited company is a limited liability company that offers shares to the general public.
Shareholders can earn money based on the company’s performance. If a company is doing well and generating profits, for example, the value of its shares increases. If a company is worth £1 million pounds and you own half the stock, your holding could be said to be worth £500,000. However, if the company expands and generates more revenue, its value might grow to £2 million. If you still own the stock, your shares will now be worth £1 million.
In addition to this, shareholders can also earn money via dividends. These are payments made to shareholders out of company profits and are usually paid on a monthly, quarterly, semi-annual or annual basis.
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Do Shareholders Invest Money?
Yes. Shareholders use their own money to buy shares in a company in the hope of making a profit. The value of a share in a company can range from 1p right up to hundreds or even thousands of pounds, so shareholders can effectively invest as much as they choose in a public limited company.
If a shareholder wants to invest in a private limited company, they will need to form an agreement with the existing shareholders. If person A and person B each own 50% of the stock in Company ABC, for example, they might agree to each sell 10% of the stock to person C. This would mean that Company ABC is now owned by three shareholders, with holdings of 40%, 40% and 20% respectively.
Alternatively, a shareholder can invest money in a public limited company simply by buying shares through a broker or by using a share dealing platform. As the company is already on the stock market, they’ve agreed to allow members of the public to buy their shares. This means that prospective shareholders do not need to liaise or even meet with other stakeholders before buying shares in the company.
How Do Shareholders Influence a Business?
All shareholders have an influence on the business, as they’re essential ‘part-owners’ of the company. However, the level of influence you have as a shareholder depends on how many shares you own or how large your stake in the company is. When company decisions are made, they’re often put to a vote, so that shareholders can govern how the business is run. Similarly, shareholders are responsible for electing people to the company’s Board of Directors, which means they have a significant impact on how the business is run and who plays a role in the management of the firm.
If you’re a director of a private company and you own 90% of the shares, for example, you’re the majority shareholder and, as such, you have significant voting rights. This enables you to make decisions with little input from other shareholders, as your majority shareholding outweighs their 10% stake in the firm. However, owners and directors must still act in the interest of shareholders and with a view to maximising profits.
In contrast, public limited companies typically have thousands of shareholders. If you have a small number of shares in a public limited company, you’ll still have voting rights but, in reality, the influence you hold is relatively small. When multiple minor shareholders are in agreement, however, their joint voting power can outweigh shareholders with a larger stake in the business.
As well as voting on company decisions, shareholders are also able to vote on who is elected to the company’s Board of Directors. Once appointed, the Board acts as the shareholders’ legal representative. As the Board is responsible for financing, strategizing, selecting managers and ensuring continuity, the shareholders could be said to have a significant impact on how the company is run, based on their ability to select who is appointed to the Board of Directors.
Does the Majority Shareholder Own the Company?
A majority shareholder typically has a controlling interest in the company, although they do not own the company outright. Instead, they have a significant stake in the firm and will hold the casting vote when decisions are made, due to the number of shares they hold.
A majority shareholder may hold as little as 50.1% of the shares in a company, or they may own 100% shares. If a shareholder retains 100% of the shares, they are the owners of the company.
While a majority shareholder that owns less than 100% of a business could be said to ‘own most of the company’, they are still obligated to act in the interests of other shareholders when exercising their rights. Furthermore, a majority shareholder cannot simply govern a company as they wish, due to the responsibilities they have to other stakeholders.
What Rights Do Shareholders Have?
Shareholders have various rights, including:
1. Right to Inspect Company Information
2. Right to Attend General Meetings
Every shareholder must be invited to attend General Meetings, which are usually held once a year and referred to as Annual General Meetings (AGMs).
3. Right to Make Derivative Claims
If shareholders believe a director has acted negligently or breached their duties, they can bring a derivative claim against them.
4. Right to Vote on Company Matters
Shareholders can vote on company matters, depending on the class of shares they hold and the company’s Articles of Association.
5. Right to Receive Annual Accounts
In addition to this, shareholders have the right to appoint a proxy to act on their behalf, inspect directors’ service contracts and receive share certificates.
Shareholders have additional rights, depending on the stake they have in the business. Shareholders who hold more than 10% of the company’s stock can force an audit to be undertaken, for example. Similarly, shareholders who hold more than 25% of the company’s stock can block special resolutions, while shareholders who hold more than 90% of shares can pass ‘squeeze outs’, which force the compulsory sale of the shares held by minority shareholders.
Where Does Shareholders Return on Investment Come From?
A shareholder’s return on investment is dependent on the financial performance of the company. If the company grows in value, the shares also increase in value. As a result, the shareholder’s stake in the organisation is worth more.
In addition to this, shareholders can be paid in the form of dividends. These dividends are calculated on the basis of how many shares a stakeholder owns. If a dividend for one share in a company is worth £10, for example, a shareholder who owns 10 shares should receive £100 in dividends, while a shareholder who owns 100 shares would receive £1,000.
However, shareholders are not guaranteed a return on their investment. In fact, if the company performs badly and loses value, the value of its shares also decreases. As a result, shareholders can lose some or all of their investment, depending on how the company performs.
This is why stockbrokers and shareholders will attempt to buy and sell shares at the right time. If you buy when share values are low and sell when they’re high, you’ll make a profit. Conversely, if you buy when share values are at a peak and the market falls before you sell, you’ll make a loss.
How to Become a Shareholder
If you want to become a shareholder in a private limited company, you’ll need to come to an agreement with the existing shareholders. If a family member is launching a start-up, for example, they might offer you a percentage of shares in return for a financial investment in the company, for example.
If you want to become a shareholder of a public limited company, you can buy shares via a broker or use a trading platform to purchase the shares yourself. If you buy shares through a broker, you’ll typically pay a commission and/or a flat rate trading fee. Share dealing platforms typically charge a monthly, quarterly or annual fee and may include a free number of trades. However, it’s important to be aware that you can also be charged an inactivity fee if you don’t make any trades, as well as being charged stamp duty on the shares you do purchase.
Why Do Shareholders Invest in Companies?
Shareholders invest in companies for a variety of reasons, but the most typical objective is to make a profit. By investing their own funds, shareholders hope to get a lucrative return. Whether you buy £100 or £10,000 worth of shares in a public limited company, you’ll want the company to perform well and increase in value, so that the value of your shares rises too. Then, you might decide to sell your shares and enjoy the profit you’ve made on your initial investment.
Shareholders in private limited companies intend to make a return on their investment too, although they may have additional reasons for investing in a business. The shareholders in a private limited company may know the owner and majority shareholder, for example, and buying shares may be a way of providing them with financial support as they embark on a new venture. Alternatively, an ‘angel investor’ or ‘seed investor’ may buy shares in a start-up with a view to making a profit and playing a role in shaping the future of the business.
While there are many reasons why someone might purchase shares in a company, the overarching objective is usually to make a large profit. Although the stock market is known to be a high-risk investment, it does give shareholders the opportunity to make significant and even life-changing profits, providing they buy, hold and sell their shares at the right time.