What Are Stockholders? Their Rights and Types Explained

A stockholder is an individual, company, or institution that owns at least one share of a company’s stock. This ownership stake, also known as equity ownership, signifies a partial claim to the company’s assets and earnings. Stockholders can benefit from a company’s success through increased stock valuation or through profits distributed as dividends.

Understanding Stockholders

Owning a share of a company means holding a fractional ownership interest with a claim on its assets and future earnings. Unlike creditors who lend money and receive interest, stockholders are owners who invest in the company’s equity. Stockholders assume more risk than bondholders, who are debt holders. Bondholders receive fixed interest payments and have a higher priority for repayment during financial distress or liquidation. Stockholders receive returns based on profitability, through dividends or an increase in the stock’s market value. Their investment is subject to market fluctuations.

Types of Stockholders

Stockholders are primarily classified based on the type of shares they possess: common stock or preferred stock.

Common Stockholders

Common stockholders own the company’s equity and represent the majority of investors. These individuals generally have voting rights, allowing them to influence corporate governance by electing board members and voting on significant corporate actions like mergers or the issuance of new securities. Common stockholders also have the potential for greater capital appreciation if the company’s value increases over time. In liquidation, common stockholders have a residual claim on assets, paid only after creditors, bondholders, and preferred stockholders.

Preferred Stockholders

Preferred stockholders typically do not possess voting rights in routine corporate matters. Their primary benefit is preferential treatment regarding dividend payments and asset distribution during liquidation. Preferred stockholders usually receive fixed dividends before common stockholders, and these dividends may accumulate if unpaid. In a liquidation scenario, preferred stockholders have a higher claim on the company’s assets than common stockholders, though still subordinate to debt holders.
Investors can also be categorized as individual (retail) investors or institutional investors, such as mutual funds and pension funds.

Rights and Privileges of Stockholders

Stockholders possess several important rights that stem from their ownership stake. A fundamental right for common stockholders is the ability to vote on major corporate issues. This includes electing the board of directors and approving significant transactions like mergers, acquisitions, or changes to corporate policies. Stockholders can exercise these rights by attending annual general meetings in person or by submitting proxy votes.

Another significant privilege is the right to receive dividends, which are distributions of a company’s profits. The payment of dividends is at the discretion of the company’s board of directors. Dividends received by individual investors in the U.S. are generally taxed as either “qualified” or “ordinary” dividends. Qualified dividends are taxed at lower long-term capital gains rates, while ordinary dividends are taxed at an individual’s regular income tax rate.

Stockholders may also have preemptive rights, which grant them the option to purchase newly issued shares before they are offered to the general public. This right helps existing stockholders maintain their proportional ownership in the company and prevent dilution of their stake. Additionally, stockholders generally have the right to inspect certain company records, such as financial statements, bylaws, and minutes of shareholder meetings.

Finally, a key protection for stockholders is limited liability, meaning their personal assets are typically shielded from the company’s debts and obligations; their potential loss is generally limited to the amount they invested in the stock.

How to Acquire Stock

Individuals can become stockholders through several common methods. New shares are first introduced to the public through an Initial Public Offering (IPO). During an IPO, a private company sells its shares to the public for the first time, often with the assistance of investment banks. While IPOs allow companies to raise substantial capital, direct participation in IPOs is often limited for individuals, with large institutional investors typically receiving the initial allocation of shares.

Most individuals acquire stock in the secondary market, which involves buying shares from other investors rather than directly from the issuing company. This is commonly done through a brokerage account, which acts as an intermediary for transactions on major stock exchanges. Opening a brokerage account typically involves submitting an application, funding the account, and then placing buy orders for desired stocks.

Some companies also offer Direct Stock Purchase Plans (DSPPs), allowing individuals to buy shares directly from the company. Employee Stock Purchase Plans (ESPPs) are another avenue, enabling employees to purchase company stock through payroll deductions.