A stockholder is a company, institution, or individual that holds ownership of at least one share of a company’s stock. Stock ownership is also known as equity ownership. It represents an ownership stake in the company. As partial owners of the company, stockholders are entitled to a share in the profits the company generates. These profits are distributed either in the form of dividend payments or through an increase in stock valuation. Alternatively, when stock prices drop, the investment value of the stockholders’ portfolio also suffers. However, it is important to note that stockholders are not responsible for the company’s debt or other financial obligations.
Stockholders of a company are endowed with certain rights due to their equity ownership in the company. Stockholders are allowed to decide the members of the board of directors, vote on major corporate decisions, and even receive a proportionate share if the company liquidates its assets. Board members appointed by the stockholders are answerable to the stockholders rather than the company’s management.
Also read: What are shares
Types of stockholders
Now that you know the meaning of a stockholder, it is time to focus on the types of stockholders. Primarily, stockholders can be classified into two main categories depending on the types of shares they own:
Common stockholder
As the name suggests, common stockholders are owners of the company’s equity share capital or common stock. Most stockholders fall under this category since common stocks are cheaper and more easily available than preferred stocks. Common stockholders also have rights, including selecting members for the board of directors and voting on essential matters like company mergers, share buy-backs, and issuance of new capital shares. Additionally, they are entitled to dividend payouts based on the company’s performance during the relevant financial year. However, they receive this dividend only after the preferred stockholders are paid.
Also read: Equity shares
Preferred stockholder
Preferred stockholders have a priority claim over the company’s profit distribution. In other words, they receive dividend payments before common stockholders. Such stockholders receive a fixed dividend, regardless of the company’s performance and profits. While preferred stockholders do not have voting rights in company matters, they are still entitled to receive payouts first if the company liquidates its assets in case of insolvency. This makes owning preferred stocks less riskier than owning common stocks.
Majority interest
Any stockholder who owns more than 50% of the company’s outstanding shares is called a majority interest stockholder. In other words, they have a controlling stake in the concerned company. In contrast, stockholders with less than 50% stake in the company are termed as minority stockholders. Usually, the majority interest stockholders are company founders. For established companies, the majority stockholder position is usually kept within the founder’s family. Since majority interest stockholders have more voting rights than the combined interest of all other stockholders, they wield a significant degree of power in influencing the operational decisions of the company, including appointing board members and appointing C-suite executives. The roles and duties of majority stockholders differ from one company to the next. In some, they may be involved in the day-to-day operations of the company, while in others, they may serve as a member of the upper management team. The majority stockholders are also more common in private companies than in publicly traded ones that have larger company stock. Since majority stockholders have a sizable controlling interest in the company, they can dictate the direction of the company, influence business decisions, and fine-tune the use of company assets.
Differences between a stockholder and a shareholder
The terms ‘stockholder’ and ‘shareholder’ pertain to investors owning shares of a company that entitles them to a corresponding ownership stake in the business. While these two terms are often used interchangeably, there can be a differentiation made on a technical basis.
In strictly technical terms, a stockholder refers to the holder of stock. In this case, stock can be shares of a company or inventory. Shareholder, on the other hand, refers to investors owning equity shares of a company. Both stockholders and shareholders can be individual investors or businesses. They also share certain benefits like voting rights, dividend payouts, claims on the residual assets of the company if it is liquidated.
While the differences between a stockholder and a shareholder are quite minimal in technical terms, they differ greatly when compared to ‘stakeholders’. Stakeholders are individuals or entities that have an interest in the company’s performance and are affected by its performance, specifically its success. They may be employees, creditors, customers, suppliers, the community, bondholders, and company management. It is also important to note that while shareholders or stockholders are always stakeholders, stakeholders may not always be shareholders in the company.
Conclusion
Investing in the equity stock of a company makes an investor a stockholder. While stockholders do not shoulder the company’s debt burden, they reap the benefits of its share price appreciation and dividends. They also play a crucial role in determining the strategic direction of a company by exercising their voting rights. Stockholders also perform a number of crucial functions, including appointment of senior personnel, controlling the company’s operations, and auditing company financials.
