Definition of a Common Stock Shareholder
The most simple definition of a common stock shareholder is that they own equity within the cooperation. The balance sheet page explains what equity in a company is and why it is important. An equity owner participated in all profits and losses within a company and has a claim to their share of the assets. Something that you might be able to relate with is owning your own business. When you own your own business, you have 100% claim to all assets within that company. The main difference is that in a publicly traded cooperation there can be an unlimited number of owners sharing these profits.
History of Common Stock
Everything in the market today is electronically traded. Another thing is you can buy 100,000 shares and you won’t even get a piece of paper saying that you are the owner. Historically, the shareholders of companies would receive a paper certificate which showed ownership. These certificates used to get issued in Round lots which is Wall Street name for shares in quantities of 100. Today common stock is traded in the marketplace in round lots. Look at the bid and ask spread for most blue chip stocks and you will notice that these are bids or ask quantities of 100 shares.
More About the Rights of Shareholders
Voting Right of Shareholders
The voting rights of shareholders are really simple. If you own 1,000 shares in a company then that means you are technically voting 1,000 times. There is a direct relationship to the amount of shares you own and how much your vote matters when you are a common stockholder. If you own 50% or more of a cooperation you could vote any way you choose and would have complete control over the cooperation.
In the modern world of finance, this is extremely rare for one individual to have this amount of power within a cooperation. Market caps can be in the billions of dollars, so there are normally thousands of people sharing control. With the majority of investments, you will notice that hedge funds and mutual funds are the largest owners because they have a large pool of money to buy the largest quantities of shares.
Legal claim to assets and Distributions
If you look through the main investment page you will see a list of all types of investments that either pay you dividends or interest. Unfortunately, for the common stock shareholders, almost everyone has a claim to a cash distribution before they receive a dividend payout. That means bondholders and preferred stockholders must receive their payout before any common stockholders can receive a cash dividend.
Due to the fact that others are paid first equity owners of a cooperation have more at risk. This risk that comes along with owning equity in a company can come with more rewards. A common stockholder will get a lower yielding dividend (in most cases) than a bond or preferred holder; however, common stock can see enormous increases in value. The stock can increase in price indefinitely which means that there is more to gain owning equity.
Some companies are mature and pay regular dividends like WalMart or Johnson & Johnson and these actually increase every year to reward shareholders. On the other hand, there are two common scenarios where a dividend will get cut and shareholder can’t do much unless they have significant control of the cooperation.
Dividends often get cut during financial hardship. We saw this happen to many businesses during the recession in 2008. They were being conservative with the leftover cash or didn’t have any profits to share. The next important scenario to mention is companies that stop paying a dividend for strategic reasons. Marriott international stopped paying a dividend in order to implement a strategy which has created even more shareholder value in the long run.
The Bottom Line
- When You Purchase shares of a company you are purchasing equity which is ownership of that company. Your investment as a common stockholder gives you the rights to vote as well as ownership of company assets.
- Your investment as a common stockholder gives you the rights to vote as well as ownership of company assets.
- Remeber Dividends aren’t guaranteed and the cooperation can stop paying them or cut them at any time.