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Shareholder

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Business Studies

Customers first, employees second, and shareholders third."

- Jack Ma

Shareholders are key stakeholders in a business. They are the ones who invest in businesses and provide funds for businesses to grow. However, being a shareholder can also be risky - let's find out why.

What is a shareholder?

Companies can sell shares to raise funds for their business and operations. All incorporated companies can sell shares. Private limited companies can decide who they sell shares to and public limited companies can sell their shares freely.

Each company is owned by its shareholders. Every shareholder holds a certain amount of a company’s shares. The more shares a shareholder owns, the more of that company belongs to them. Shareholders can either be individual investors, or other limited liability companies and organisations. These individuals or organisations purchase shares to make a profit through dividends.

Dividends are a part of the company's profits which they pay to shareholders depending on the number of shares they own. The more shares you own in a company, the more of the company's profits you will receive in the form of dividends.

Shares can also be traded. You could buy a share in a company, receive dividend payments, and later on sell the same share you bought previously for a higher price. The price of your share is dependent on how well the company is doing financially.

Shareholders' agreement

A shareholders' agreement is an agreement among shareholders or the members of a company.

A shareholders' agreement explains all the different terms and conditions a shareholder can expect when buying and owning shares in a company.

The shareholders' agreement explains the different processes, outcomes, and rights shareholders have within the company. Typically, a shareholders' agreement consists of:

  • The shareholders' rights and obligations.

  • How the sale of shares is regulated within the company.

  • How the company will pay dividends.

  • How the company will plan on growing in the future.

  • Describes the management of the company or how the company is going to be run.

  • Describes how decisions are made and how they will be made in the future.

  • Describes how the company is going to raise funds.

Shareholder implications

Shareholders can influence the decision-making process of a company. Most types of shares, especially if you own a lot of them, will grant you decision-making rights in a company. This decision-making right is called the shareholder's voting rights. By buying more shares, you will have more influence over the outcome of the decision.

Let's say each share is worth one vote and the company is made up of 100 shares. If you purchase one share, it means you get one vote on a certain decision the firm is going to make. However, if you buy twenty shares in the company, you have 20 percent of the decision-making power. By buying more shares, you will have more influence over the outcome of the decision. If you were to own 51 or more percent of the shares in the company, you would control the business. Typically, individuals do not own significant percentages of large public companies.

There is a difference between shareholders and stakeholders. Every shareholder in a company is a stakeholder. However, not all stakeholders are shareholders.

Advantages and disadvantages of being a shareholder

As we know, setting up a company can be risky. In the same way, buying shares in a company comes with its own sets of risks. However, buying shares and investing in a company, when done correctly, can be a very rewarding process.

Advantages of shareholders

Shareholders usually invest in a business for monetary purposes. This means that you buy shares in a company, and hopefully, the company makes a lot of profit that they can pay you in the form of dividends. The more profit the company makes, the more you will likely receive dividend payments.

Another advantage of buying shares is to trade these shares. Some shareholders invest in hopes of making large returns. One of the ways in which a shareholder could do this is by buying shares at a lower price point and later on selling them at a higher price. Usually, riskier companies will offer higher returns.

Disadvantages of shareholders

There is always a risk that comes with buying shares. If the company makes bad financial decisions or hires managers and executives that are not aligned with the mission of the company, the price of its shares will fall.

There are also external influences, like the economy as a whole, that could impact a company's share prices. For instance, during a financial crisis, no matter how well a company is being managed, share prices will most likely decrease. Because of a negative economic climate, companies are also likely to make lower profits than expected. As a result, the dividends shareholders receive will also be lower than expected.

Shareholder - Key takeaways

  • Each company is owned by shareholders. The more shares an individual or organisation holds in a company, the higher their influence on the decision-making process of the company.
  • Shareholders are paid dividends. The amount of the dividend payment depends on the profitability of the company.
  • The advantages of buying shares include the receipt of dividends and the returns you can get from trading shares.
  • Buying shares can be risky. If a company does not perform well share prices can decrease.
  • If a company is not as profitable as expected, shareholders will receive small dividend payments.

Shareholder

Each company is owned by its shareholders. Every shareholder holds a certain amount of a company's shares. The more shares a shareholder owns, the more of that company belongs to them. Shareholders can either be individual investors, another limited liability company, a bank, or an insurance company. These individuals or organisations purchase shares to make a profit through dividends. 

A shareholder is an investor in a private or public company. Shareholders are owners of the company and therefore get to make decisions about how a company operates. To be a shareholder in a company, you need to own at least one share of the company. Shareholders can be individuals, companies, or other types of organisations. 

A shareholder is a person or an organization who has invested in a private or public company. To be a shareholder, you must own at least one share of the company. As a shareholder, to are entitled to make certain decisions in the company. Shareholders are also invited to an Annual General Meeting (AGM) and receive annual reports on the company's performance during a financial year. 

There are two main types of shareholders: ordinary and preference shareholders. Ordinary shares are the riskier type of shares, as holders of ordinary shares only receive payments after many other stakeholders in the company have already been paid. Ordinary shareholders will only be paid after those who have lent the company money have been refunded. Preferred shareholders receive a fixed payment each time the company pays dividends. Preferred shareholders will be paid before ordinary shareholders, although they will not receive payments larger than the fixed amount.

Final Shareholder Quiz

Question

What is a shareholder?

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Answer

A shareholder is an investor in a private or public company. Shareholders are owners of the company and therefore get to make decisions about how a company operates. To be a shareholder in a company, you need to own at least one share of the company. Shareholders can be individuals, companies, or other types of organisations.

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Question

What is the Annual General Meeting (AGM)?


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Answer

All companies hold a yearly meeting called an Annual General Meeting (AGM). Every shareholder is invited to attend and each shareholder receives the annual report of the company.

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Question

What is a dividend?


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Answer

As a shareholder, you expect to make a form of financial gain from investing in a company. This means that you buy shares in a company, and hopefully, the company makes a lot of profit that they can pay you in the form of dividends. The more profit the company makes, the more you will likely receive dividend payments.

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Question

Are dividend payments equal to the original investment shareholders made into the firm?


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Answer

No. Dividends are paid based on the profits the company has made. This does not mean that shareholders receive the value of their original investment each time a dividend is paid to them.

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Question

Executives are expected to run the company in the best interest of:

  1. Managers

  2. Stakeholders

  3. Shareholders

  4. Employees

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Answer

C.

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Question

What are some of the advantages of buying shares?


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Answer

  • Receiving dividends if that company is profitable. The more profits the company made in a certain period, the more dividends shareholders will receive. 
  • Returns earned from trading shares. If an investor buys shares when they are valued at a low price and holds them until their price increases, they could make a substantial return from selling their shares at the higher price.

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What are some of the disadvantages of buying shares?


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Answer

  • Buying shares is risky. It is not possible to accurately predict how well a company's management will perform. There is always a possibility that the price of a share decreases. 
  • The economic climate can also impact share prices. If the economy is not doing well, investors will be less confident in investing, which could drive down the prices of shares.

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Question

What are the different types of shareholders?

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Answer

There are two main types of shareholders: ordinary and preference shareholders. Ordinary shares are the riskier type of shares, as holders of ordinary shares only receive payments after many other stakeholders in the company have already been paid. Ordinary shareholders will only be paid after those who have lent the company money have been refunded. Preferred shareholders receive a fixed payment each time the company pays dividends. Preferred shareholders will be paid before ordinary shareholders, although they will not receive payments larger than the fixed amount.

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Question

One of the advantages of buying shares in a company is: 

  1. The potential to decrease the price of its shares

  2. The potential to become an employee in the company 

  3. The potential to make profits for the company

  4. The potential to earn dividends. 

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Answer

D.

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Question

You are thinking of buying shares in a company. What information would you want to know before deciding to invest?


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Answer


  • Share price and the type of shares you could buy (ordinary or preference shares)
  • How profitable the company was during the past couple of years 
  • What type of dividends does the company pay
  • General economic environment

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Question

Buying ordinary shares is: 

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Answer

Risky because preferred shareholders will be paid before ordinary shareholders.

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Question

During the most recent financial year and the company's profits almost doubled. Therefore, you would expect:


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Answer

The company's share price to increase 

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Question

In the event of a financial crisis, you would expect: 


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Answer

Share prices to decrease and investment to decrease 

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Question

During an economic downturn, as a shareholder, you would expect:


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Answer

The company to make less profit 

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Question

The rise in share price is an indication of: 

  1. Good management  

  2. Economic downturn

  3. Low short-term profits 

  4. Poor investment decisions 

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Answer

A.

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Question

Which of the following business can distribute profits to shareholders?

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Answer

A limited liability company

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Question

Who can be the shareholders of a company?

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Answer

individual investors, or other limited liability companies and organisations 

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Question

The profits received by shareholders of a firm are called ...

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Answer

dividends

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Question

The more shares you own in a company, the more of the company's profits you will receive in the form of dividends. 

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Answer

True

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Question

What determines the price of a company's share?


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Answer

The financial performance of the company

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Question

The terms and conditions a shareholder can expect when buying and owning shares in a company is explained in the ...


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Answer

shareholders' agreement

Show question

Question

Shareholders can influence the decision-making process of a company. 


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Answer

True

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Question

What is voting right?


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Answer

The decision-making right that a firm grants its shareholder

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Question

Suppose a company is made up of 100 shares and you own 20 shares. How much decision-making power do you have in the company?

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Answer

20 percent

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Question

You can increase your decision-making power in a firm by purchasing more shares. 

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Answer

True

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Question

What is the minimum percentage of shares to control a company?



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Answer

51 percent

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Question

Individuals usually do not own significant percentages of shares in large public firms. 

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Answer

True

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Question

Every shareholder in a company is a stakeholder. 

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Answer

True

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Question

Every stakeholder in a firm is a shareholder.

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Answer

True

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Question

What is the advantage of being a shareholder?

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Answer

Receive dividends when companies do well financially

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Question

Buying shares can be risky if the company does not perform well financially. 

Show answer

Answer

True

Show question

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