What Is a Shareholder?

Definition and Examples of Shareholders

Shares represent a fractional ownership interest in a company. Because a shareholder owns one or more shares of stock in a company, a shareholder is a partial owner of the company.

A corporation may offer shares through an initial public offering (IPO) because it wants to transition from a private to a public company, raise money for expansion, develop new products and services, or pay off debt. The public can buy those shares through a brokerage firm.

Once you’re a shareholder, you have a claim to the company’s earnings and assets, and a right to vote on certain management decisions. For example, in May 2021, the shareholders of Chevron Corporation voted to approve a proposal to reduce emissions from the use of its products.

Types of Shareholders

To understand the types of shareholders there are, you have to start at the two main types of stocks a company may issue: common and preferred. When we discuss shareholders, we are usually referring to those who own common stock versus preferred stock.

A common shareholder is what is known as a “residual claimant,” meaning they are the last in line behind creditors, such as banks, bondholders, and preferred shareholders, to receive the income the business generates through dividends.

Creditors and preferred shareholders receive a fixed payment from the corporation, so the common shareholders could benefit if the business generates significant profit. If the business does not generate enough cash flow to pay creditors and preferred shareholders, then the common shareholders get nothing.

Preferred shareholders, on the other hand, receive a fixed dividend and usually do not have a claim to any additional earnings. Preferred shareholders also do not have corporate voting rights.

Shareholders vs. Bondholders vs. Stakeholders

Shareholders are different from bondholders and stakeholders.

Shareholders hold equity in the company, and receive dividends and capital appreciation on their shares only if the business does well and generates sufficient income. Bonds are debt arrangements, and bondholders are lenders. They receive fixed-interest payments from the corporation until their bonds mature and they are paid back.

Stakeholders make up a broad group that includes anyone who stands to be affected by the business (employees, investors, etc.). Although stakeholders include creditors and shareholders, stakeholders do not necessarily provide capital to the business and may not receive a payment like shareholders and bondholders.