If you’re looking for ways to invest your money, you might consider becoming a shareholder. Shareholders are vital in shaping the direction of a company, but what exactly is a shareholder, and what role do they play? We’ll explore the definition and types of a shareholder, their rights and responsibilities and how you can become one. We’ll also guide you through the benefits and risks associated with becoming a shareholder and how Cooper Associates can advise you on investing in shares.
What is a Shareholder?
A shareholder is an individual, company or organisation that owns shares in a company. You only need to own one share to be considered a shareholder, but anyone who owns more than 50% of a company’s stock is considered a majority shareholder. Conversely, any shareholder who owns less than 50% of the stock is known as a minority shareholder.
Each share entitles a shareholder to a portion of a company’s assets and profits, meaning shareholders stand to gain from its financial performance. A company uses investment from shareholders to operate and grow. In return, shareholders benefit from dividends or an increase in share value, with share value increasing or decreasing depending on the company’s success. While shareholders and directors are not the same thing, it’s common for shareholders to also be directors in smaller businesses.
UK businesses must report an annual confirmation statement to Companies House every year. This contains details of all shareholders and is available to the public.
Types of Shareholders
There are two primary types of shareholders: common shareholders and preferred shareholders.
Common Shareholders
Common shareholders own a company’s common stock, which represents partial shares in a company. This type of shareholder may have the power to vote on company decisions and determine how the company is run. How much power a shareholder has in the decision-making process depends on the type of shares and how many shares, thus how many percentage points, they own in the company. Should a company be dissolved, common shareholders will be the last to receive assets.
Preferred Shareholders
In general, preferred shareholders are granted preferential treatment over common shareholders – as the name suggests. While the shares held by preferred shareholders typically do not carry voting rights or a say in company matters, they are paid in dividends which are paid out before those of common shareholders. These dividends are usually a fixed amount and are paid on a regular basis. If a company is dissolved, preferred shareholders will also receive their payout before common shareholders.
Shareholder Rights
The rights you have as a shareholder depend on the company, the type of stock and how many shares you own in a business. The more shares you have, the more leverage you have in how the business is run.
In general, the following rights come with a shareholder’s ownership:
- Voting Rights: Common shareholders can vote on company matters including how the company is run.
- Right to Legal Action: If shareholders believe the company is being run unfairly, they have the right to sue for wrongdoing.
- Dividends: A dividend is a portion of a company’s earnings that it pays to its shareholders, as their share of profits. Should a company perform well during a set period, typically annually or quarterly, it may distribute some of its earnings as a reward to shareholders.
- Access to Information: Shareholders have the right to access company records such as operations and financial health.
- Ability to Sell Shares: As a shareholder, you have the right to sell your shares to another shareholder or third party with the aim being at a price higher than you originally obtained to achieve capital growth.
How Shareholders Influence Company Decisions
Because shareholders have a stake in the business, they can directly influence the direction of a company. Using their voting rights, shareholders can make key decisions such as electing the board of members, setting directors’ salaries, changing the company structure or naming and authorising the creation or transfer of company shares.
In larger companies, institutional shareholders (such as pension funds or mutual funds) may have more control over company decisions due to the larger number of shares they hold. However, smaller shareholders can still impact decisions by forming coalitions or engaging in proxy voting.
Shareholders as a collective control most of a company’s operations, meaning they have a significant say in its performance and profits.
Benefits and Risks Involved
People become shareholders for a number of reasons, but the main attraction is the potential to make a profit if the company performs well. Dividends are also taxed at a lower rate than income tax and you are not required to make national insurance contributions on them. If you receive more than £500 in dividends per year, you will need to submit a self-assessment tax return to HMRC to pay the dividend tax you owe.
As a shareholder, you’re entitled to make decisions about how a company is run and structured with limited personal liability for its debts. However, if the company you have shares in faces financial difficulties, the value of your shares may decrease, reducing or even eliminating your dividends and the share value.
At Cooper Associates, we can help you navigate these risks so that you can make the right decision for your financial situation.
How to Become a Shareholder
You automatically become a shareholder when you buy shares in a company or have shares transferred to you. There are other ways to become a shareholder, such as inheriting them from a relative or having them gifted to you. You can also acquire shares through workplace schemes. If you provide funding or investment in a business you can receive shares in return.
Are you thinking of becoming a shareholder? Our Wealth Management team can help you make informed decisions about investing in shares, advising you on investment strategies and portfolio management. With our expertise in financial planning and commitment to providing personalised advice, we can help you maximise your shareholder value.
The value of a pension with St. James’s Place may fall as well as rise. You may get back less than the amount you invested.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
