Shareholders: Definitions, Role, and Types
A shareholder is an individual, company, or institution that owns at least one share of a company's stock.
By owning a share, they own a slice of the corporation, entitling them to a claim on a part of the company's assets and earnings. Their stake in the company directly corresponds to the number of shares they own.
Take Warren Buffet for instance, who is known for owning significant shares in companies like Apple and Bank of America through his firm, Berkshire Hathaway. As of 2021, Berkshire Hathaway was Apple’s second-largest shareholder, owning approximately 5.4% of Apple’s outstanding shares.
Roles of a Shareholder
Shareholders are pivotal to a corporation and their decisions can significantly shape the direction of the company. Here are the primary roles shareholders play:
Shareholders express their influence by voting on corporate policies and board of director members. The magnitude of their voting power is usually proportional to the number of shares they own. For instance, in 2020, shareholders of the pharmaceutical company Gilead Sciences voted on a proposal to reduce drug prices, signifying their ability to influence the company's policies.
Ownership in a Portion of the Company
Shareholders are part owners of the company, with their ownership stake corresponding to the number of shares they hold. This stake provides them a say in the company's performance and future. If you recall the 2008 financial crisis, Lehman Brothers' shareholders felt the brunt of their ownership when the company went bankrupt, losing nearly all of their investment.
Right to Dividends
When a company reaps profits, a portion of these profits might be distributed to shareholders as dividends. While dividends are not guaranteed, when issued, shareholders have a right to their shares. For example, Johnson & Johnson, renowned for its commitment to dividends, has increased its dividends for 57 consecutive years, rewarding its shareholders consistently.
Right to Transfer Ownership
Shareholders possess the ability to sell their shares, effectively transferring their ownership stake. Everyday trading on global stock markets like the New York Stock Exchange and the London Stock Exchange represents this right in action.
Right to Information
Shareholders have a right to obtain certain vital information about the company. They can access financial statements and other company details to make informed decisions about their investments. In the case of Enron's collapse in 2001, a lack of transparency and the subsequent discovery of financial fraud highlighted the importance of this right.
Types of Shareholders
Shareholders generally fall into two categories:
Individual shareholders are persons who buy shares in a company. When Twitter went public in 2013, thousands of individual investors became shareholders in the company.
Institutional shareholders are entities such as mutual funds, pension funds, and insurance companies that invest in shares. For example, The Vanguard Group, BlackRock, and State Street Global Advisors are some of the largest institutional shareholders in companies like Amazon and Google.