Shareholders: What They Are and How It Can Affect Your Investments
Companies aren’t just whole entities.
They’re made up of tiny parts called shares. Each share represents a certain percentage of the company, and shareholders own those shares.
When you invest in the stock market, you buy shares — essentially pieces of paper that entitle you to a portion of the company’s profits if it makes money. Whether you make or lose money depends on the stock price.
For instance, if a company’s stock is trading at $14 per share and you buy 1,000 shares, you’ve invested $14,000 in the company. Should the stock shoot up to $18, you’ll make money. If it sinks to $12, you lose money.
Investors buy shares of stocks because they want to turn a profit. If they’re like me, they might invest in small companies for hours or even minutes. Others hold onto more expensive stock for months or years.
Regardless, everyone who invests in the stock market trades shares. But what is a shareholder and how does the process work?
What Is a Shareholder?
A shareholder is someone who owns shares in a particular stock. People like you and I can buy shares and become shareholders. So can companies and financial institutions.
As long as you own at least one share in a company, you’re a shareholder. You’re also an investor, because you’re investing in that company’s ability to earn you a profit.
Stock valuation determines whether or not you make money on any single investment. The market — supply and demand — determines the price per share of a given stock. Many things can influence stock prices, from public interest and news to mergers and acquisitions.
The important thing to know is that, once you buy a share of stock, it’s yours until you decide to sell it.
This also means that you own part of the company. You can’t walk into the CEO’s office and start making demands, nor can you make marketing decisions or decide what products to launch. However, you’re entitled to make money when the stock price increases.
Unlike other interested parties, your ability to profit from being a shareholder is tied directly to stock price and not to any other number. In other words, a company can produce revenue even if the stock price dips. In that case, you lose money even though the company profited.
Who Are the Shareholders of a Corporation?
The shareholders of a corporation are people who own shares in the company’s stock. You can buy shares in myriad ways, from the major stock exchanges to over-the-counter (OTC) electronic trades.
I want to go back to supply and demand because it’s the crux of being a shareholder.
When there are sellers in the stock market, buyers can purchase those shares. Similarly, if you own shares in a particular company, you can sell them as long as there is someone willing to buy them.
It’s no different from a ticket you buy for a concert. As long as the concert isn’t sold out, you can buy tickets, and if you decide not to go to the concert, you can sell your ticket to someone who is willing to buy it.
With both shares and concert tickets, you can’t sell something nobody wants. That’s why you want to get out of a stock — e.g. sell your shares — at an opportune time. I don’t like risk, so I’m conservative when I buy shares of a stock. I encourage you to do the same.
What Does a Shareholder Do?
This is a complicated question that has different answers depending on the type of investment. If you’re a shareholder for a public company, you have more rights — but not responsibilities — than if you were a shareholder in a private company.
For instance, shareholders often vote on business matters, help elect the board of directors for a particular company, or help decide how much money directors can earn. Those rights are beyond the scope of this article.
The important thing you need to know is that you have the right to profitability. In other words, if the stock price increases, you can sell for a profit. Furthermore, if you’re involved with long-term investments, you might be eligible for dividends, which I’ll discuss in more detail later.
I’m a shareholder more often than not, but I’m not in it for the long-term investment. Instead, I want quick gains from penny stocks and other very inexpensive stocks. I might buy 3,000 shares of a company for $2.50 per share and sell an hour later for $2.78 per share.
You might take a different strategy. For instance, if you were to invest in Apple, Netflix, or Google, you’d likely hold on to those shares for an extended period of time.
And that’s what shareholders do. They buy and sell shares in stocks they think will make them money.
Importance of Shareholders
Companies need money if they want to expand their operations, pay their employees, buy new equipment, or grow into new markets. Most businesses don’t have that kind of cash strewn across their offices.
These corporations sell portions of their companies instead. Each portion — a share — is an investment in the business for the future. The company can use the money it raises through stock market investments to finance their next phase.
There are other ways to raise money, of course. Companies can seek private investors to fund specific projects. If you’ve seen “Shark Tank,” you know exactly what I’m talking about.
Having shareholders can also help attract the best talent to a company. Some businesses use stock as part of their benefits packages. Certain employees receive set amounts of shares in the business. This perk can make a company more attractive to a professional who wants a new job.
How Do You Make Money as a Shareholder?
There are two basic ways to make money as a shareholder. One involves a long-term approach (dividends) and the other can involve both long- and short-term strategies (capital appreciation).
Before I go on, I want to make clear that you don’t always make money as a shareholder. You can lose your entire investment and, depending on the type of position, lose even more than your initial investment.
Just a few days ago, for instance, I bought several shares of stock at a decent price. I saw the bounce coming, and I intended to wait it out.
The stock price dipped, and I had a choice to make. I could sell at a loss or wait and see if it would bounce back up.
Based on my experience and my forecast, I decided to take Door Number Three instead. I bought more of the stock because I believed it would pay off. And it did. I wound up making more money than I intended in the first place.
But that doesn’t always happen. An investment isn’t a loan, so you’re not guaranteed repayment — and certainly not with interest.
Can you make money? Absolutely. I’m living proof. But you need a strategy.
I’ll be back tomorrow with more detail on some of these terms and how they apply to shareholders.
Editor, Penny Stock Millionaires