What Does Being a Shareholder Mean?

February 8, 2022

Owning shares of stock in a company is a way to invest in that company’s future. When you do so, the resources you invest go to fund that company, allowing it to grow and operate. But what does it really mean to be a shareholder? Here’s what you need to know.

Becoming a Shareholder

There are several different ways to purchase shares of stock in a company. You (or a financial manager acting on your behalf) can select specific companies that are listed on a public exchange, such as the New York Stock Exchange or the NASDAQ and purchase as many stocks as you wish, provided you pay the price per stock. This entitles you to share certificates that provide proof of the number of shares you’ve purchased.

However, some prefer to diversify their investments instead of limiting them to just one or two specific companies. In such a case, many choose a mutual fund, which is a group of stocks that have been chosen by a fund manager. Investments in mutual funds are spread across the entirety of the fund under the watchful eye of the fund manager.

A third way to become a shareholder is to invest in a stock index. Like mutual funds, stock indexes are similar in that they are composed of several different companies to provide a more diversified investment experience. However, unlike mutual funds, there is no specific fund management activity.

What You Get for Being a Shareholder

Regardless of the type of stock investment you’ll be making, once you’ve invested your funds in company stocks you are considered a shareholder. As a shareholder, you are awarded several rights by the companies you own. These rights may include:

  • Selling your shares at any time
  • Attending shareholder meetings
  • Receiving dividends when distributed
  • Voting in shareholder meetings

It’s important to note that not every shareholder is granted the right to vote in shareholder meetings, though. In large companies with millions of shares sold, it is simply impossible to allow every single shareholder a vote. Instead, this is a privilege that is reserved for high-volume shareholders, as the more shares you own, the larger percentage of the company you own. These shareholders therefore have more of a right to dictate the direction of the business.

The Downside of Owning Shares

Owning shares does come with many benefits, but there are many associated risks as well. One of the most obvious of these risks is that you may not receive any return on your investment. The cost of the shares you purchased fluctuates over time, depending on the performance of the company; if the company you invested in is not successful, the price per share will go down. If you sell those shares, you will lose a portion of your investment.

Stock investors also need to understand that while they will receive dividends from their company whenever it is profitable, there is no set schedule for dividend distribution. Many companies will choose to reinvest their profits back into the business to facilitate growth, and this decision is determined by the board of directors elected by the shareholders – not shareholders directly.

Common Misconceptions About Owning Shares

There are other things you should know about what it means to own shares in a company, especially because many shareholders may have misconceptions about what it means to own that stock. One of these misconceptions is that, because you are a joint owner of the company, you have the authority to do things such as give orders to company employees and be granted full access to company property.

Unfortunately, this is not the case. Part of being a shareholder includes electing a board of directors that you then delegate your ownership duties to when it comes to the day-to-day running of the company. So while you do have control over who is steering the ship so to speak (as long as you have voting rights), you don’t get to dictate how the directors run the company you’ve invested in.

Another common misconception is the idea that owning stock in a company entitles you to free or discounted products or services. While there may be some companies that periodically hold annual gatherings for shareholders to attend where they can buy discounted goods, for the most part such a practice is extremely rare.

The Final Word on What Share Ownership Means

Investing in company shares does provide you with several benefits. First and foremost, you can experience investment growth if the stock price of your company increases in value. This means that if you ever do sell your shares, you’ll receive a return on your investment. Additionally, you can receive dividends and, if you own enough shares, to elect board members who will then run the company.

But owning shares doesn’t mean that you have any direct control over the company itself. You don’t have the authority to simply walk onto company property or give employees orders and directions. You also don’t necessarily get free or discounted goods just because you’re a shareholder. In some cases, you might not even get dividends regularly if your company reinvests its profits.

Yet despite these limitations, countless individuals choose to invest by becoming shareholders in publicly traded companies. This is because such an investment is considered a long-term one. With luck, and with the leadership of the board of directors elected by shareholders, owning shares in a company can be passed down as a legacy to your children and grandchildren to provide financial stability.

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