3 Benefits of Owning Shares in a Company

Corporations issue shares and offer them for sale in order to raise capital. A share is a unit of capital which expresses the investor’s ownership interest in a corporation. An investor who owns a share in a company is called a shareholder. A shareholder, or a stockholder, is thus one of the very many owners of that company.

A share entitles the holder to a portion of the company’s profits and to an equal obligation for the company’s debts and losses. Companies can issue two major types of shares – common shares and preferred shares. Since shareholders can invest in either of these types of shares, it is important to assess the benefits each type has to offer.

Let’s take a look at three benefits of owning shares in a company.

1. Shareholders are entitled to a portion of the company’s profits

Corporations redistribute profits to their shareholders, also known as their owners. The redistribution of profits is proportional to the amount of shares an investor owns. Following is a comparison of the distribution of profits between common and preferred shareholders.

 

Common Shares Preferred Shares
What tool does a corporation use to redistribute its earnings to its shareholders? Companies distribute money in the form of dividends to its investors. Companies distribute money in the form of dividends as well, but they are different than the dividends paid on common shares.
What is the difference between the dividends of the two types of shares? Common shareholders receive non-cumulative dividends. These dividends may or may not be paid to shareholders, with no further obligations, at the company’s discretion. Preferred shares generally pay cumulative dividends, but it is not always the case. If a company were to skip a payment on a cumulative dividend when it is due, it would still be responsible to distribute it in the future, possibly with interest.

 

When do shareholders receive their share of the earnings? Common shareholders usually receive dividends at regular intervals, such as monthly, quarterly or annually, but ultimately a company’s board of directors decides whether or not to pay out the dividends. Companies distribute dividends to its preferred shareholders at regular intervals. If a company were to miss a payment, they would have to pay it before any future dividends are paid on either type of shares.
Do corporations guarantee the distribution of dividends? No, the board of directors can choose to skip a payout and not compensate its investors for it. No, dividends can be cut or suspended. However, the board of directors usually only decides to skip a payout in times of financial distress and compensates the investors at a future date.
Who bears the greatest risk when it comes to profit redistribution? Common shareholders bear a greater risk since they are paid after the preferred shareholders and the dividend amount is variable. Corporations reward investors for their risk since common shares respond to higher corporate earnings. Preferred shareholders generally bear a smaller risk because they can buy stock that offers cumulative dividends. The preferred dividend is fixed, which makes preferred shares behave as bonds, rather than as stocks.

 

 

 

2. Shareholders are entitled to a portion of the company’s assets

Shareholders can claim a portion of the assets should the company become bankrupt and need to liquidate. The redistribution of the portion of the assets is done proportionately to the amount of shares an investor owns. However, preferred shareholders receive a preferential treatment.

 

Common Shares Preferred Shares
Who has priority to claim a portion of the company’s assets in case of liquidation? Common shareholders are the last ones to be paid in the event of bankruptcy and liquidation since creditors, bondholders and preferred shareholders have priority. In the event of liquidation, preferred shareholders claim a portion of the assets before common shareholders, but still after debt holders.
Who bears the greatest risk in case of bankruptcy? Common shareholders bear a greater risk, since they are entitled to a portion of the company’s assets, if any, after payment to debt holders and preferred shareholders. Preferred shareholders bear a smaller risk, since they are entitled to a portion of the company’s assets, if any, before common shareholders, though they remain subordinate to bondholders.

 

 

3. Shareholders can vote to elect the board of directors

Shareholders have a say in the company about the affairs of the corporation, including control and influence over the selection of company management to a certain extent. A shareholder’s impact on the decision is proportional to the number of shares owned. Nonetheless, common shareholders receive a privileged treatment.

 

Common Shares Preferred Shares
What type of shareholder can vote? Common shareholders can vote. Preferred shareholders cannot vote, except in unusual circumstances.
How many votes is an investor entitled to cast? Common shareholders voting rights generally equate to one vote per share owned. Therefore, investors who own a larger amount of shares can influence decisions to a greater extent. Generally, zero.
Can an investor obtain more than one vote per share? Yes, in terms of voting rights, companies can offer different classes of stock, thus allocating different voting rights to select groups. For example, shareholders of class A shares are entitled to 10 votes per share while class B shares are entitled to one vote per share. N/A

 

It is important to note that the financial information provided in this blog is for informational purposes and not for the purpose of providing specific financial advice. You should contact a financial advisor to obtain specific advice tailored to your needs.

 

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