Being a Shareholder: What You Need to Know and Why
Yesterday, we got into a big lesson on shareholders. So big, I needed two articles.
Below, you’ll find more context for the things discussed in yesterday’s article, which you can find in your inbox under “Shareholders: What They Are and How It Can Affect Your Investments” or by clicking here.
Now, read on for the information you need as you grow in your investing understanding, and subsequent career!
Dividends are monies paid to shareholders based on a company’s earnings. Dividends can arrive monthly, quarterly, or annually, and usually come in the form of cash.
When you get dividends in the form of additional stock, they’re called stock splits. Cash dividends, however, are far more common.
The general idea is that a company divides its earnings equally among its shareholders based on how many shares each individual or entity owns. For the sake of a simplistic example, if you owned 20 percent of a company’s shares, you’d receive 20 percent of its dividends.
Major stock exchanges often get a large portion of their returns from dividends. Although capital appreciation still wins the lion’s share, it’s not a good idea to discount dividends as a potential profit source.
A company pays dividends to attract more investors. If you knew that you could profit at regular intervals just for owning shares in a company, you’d find that investment more attractive than if you were just banking on stock price appreciation upon selling your shares.
This is the bread and butter of the stock market. It can happen in a very short time frame — down to the seconds — or it can take place over a long period of time.
Capital appreciation refers to the increase of a stock’s price. Conversely, capital depreciation describes a dipping stock price.
As an investor and shareholder, you want to earn money on your investment. As shares become more expensive, you stand to earn more money, and you can divide your investment capital over as many stocks as you wish.
How to Be a Shareholder
If you want to become a shareholder in a particular company, you’ll need a broker account and an initial capital investment. The amount of “starter” money you need depends entirely on the types of stocks you wish to buy.
For instance, I got my start in penny stocks with just over $12,000 — money saved from my childhood. Others have gotten started with as little as $500.
If you want to trade blue chip stocks, you’ll need far more money. Many brokers won’t approve your application unless you have at least $20,000 or $30,000 to put into your account.
Brokers can have other requirements, too.
For instance, many won’t approve applications unless the applicant has a minimum net worth or annual salary. This is to maintain the integrity of the brokerage account.
Brokers might ask you what your trading goals are and what type of trading strategies you intend to use. They use your answers to decide whether or not you’re a good fit for their firm.
You must then place a buy order through your broker. For example, you might want to buy 100 shares of ABC stock at $10 per share. That will cost you $1,000. Your broker will also charge a commission, which you must add to the total amount of money you’ll set aside in your brokerage account.
You can decide whether to buy the shares at market price or to place a limit order, which means that you only want to buy shares of that stock if the price hits a certain point.
Role of Shareholders in a Company
The roles of shareholders depend on the type of shareholder in question. If you’re simply trading stocks on the stock market, you don’t have a role beyond buying and selling. That’s the easiest — and, in my opinion, most profitable — way to get started with investing.
Shareholders can also be owners, founders, or employees at a company. In this case, they have far greater roles because they’re involved with the business’s operations.
Even vendors can be shareholders. A company might enter into a barter-type agreement in which the vendor supplies his or her products or services for a specific time in exchange for X shares in the company.
The Shareholder Agreement
A shareholder agreement creates a contract between the people who own shares in a particular stock and the company behind the stock. It addresses issues like the rights and obligations of both parties.
Standard shareholder agreements also contain information about how a company should be run, such as the process for electing the board of directors and determining salaries for directors. If you’re investing in the stock market, you don’t need to worry about any of these details.
Types of Shareholders
There are two types of shareholders or stockholders. The first is a common stockholder and — as you might have guessed — is the most common arrangement. If you’re buying shares of a stock on the stock market, you’re a common shareholder.
Preferred shareholders, on the other hand, have a different arrangement. They typically get paid greater dividends and at more frequent intervals.
Examples of Shareholders
As I’ve mentioned before, my goal when investing in the stock market is to turn a quick profit. This is commonly known as day trading, and it doesn’t involve any long-term strategies for watching stock prices ebb and flow.
Even though it’s called day trading, my trades often last only minutes. The only qualification for day trading is that you buy and sell your shares of a specific stock between the open and close of the market.
Other shareholders take a long-term approach. They’re saving for retirement, for instance, and they want to profit from dividends of major corporations, then get a big payout when they eventually sell their shares for a premium.
This isn’t my style, but there’s nothing wrong with it. I just recommend educating yourself on long-term trading before you make your first purchase.
There are some shareholders who have greater interest in the company behind the stock. They might want the opportunity to influence company policy, for instance, or sway corporate social responsibility. These investors tend to buy larger stakes in companies, and they’re often experts in risk mitigation.
Frequently Asked Questions
I get a lot of questions from people who are new to the stock market and confused about shareholders. Let me address the most common questions here so you have a handy reference.
Who Can Be a Shareholder?
Anyone who has the money to invest in shares can become a shareholder. There are numerous online brokerages that allow you to set up an account in minutes, and even if you only have a small initial investment, you can start with penny stocks or similarly inexpensive shares.
Does this mean you should be a shareholder? Not necessarily. If you’re not familiar with the stock market and how it works, I caution you to hold off.
I’ve seen far too many people jump head first into the stock market and take a huge fall. I don’t want that to happen to you, so make sure you know what you’re doing before you put in your first buy order.
Who Determines Stock Prices?
The stock price is determined by supply and demand. Many factors can influence the price of a stock.
For instance, if a company suddenly announces an acquisition of another company, its stock price is likely to climb. An acquisition suggests fiscal health to investors, so they’ll want to get their chance to profit off the announcement.
Negative news or financial reports can cause a stock’s price to plummet. Additionally, so-called gurus often announce “hot” stocks in which to invest, which can temporarily inflate stock prices. Only the guru benefits in that case.
Finally, buyers and sellers decide the prices at which they’re willing to conduct transactions. Some investors are willing to pay market price, while others have mental stops or use limit orders.
Shareholders vs Investors vs Stakeholders
Shareholders, investors, and stakeholders have quite a bit in common, but they’re not the same things.
Let’s break it down a little…
A shareholder is someone who has purchased one or more shares of a given company. That’s it. If you buy one share of APPL (Apple), you’re a shareholder in Apple, Inc.
Investors are people who use liquid cash to invest in companies, government agencies, and other opportunities for the purpose of making a profit. A shareholder is typically considered an investor because his or her desire is to make money. However, an investor who puts money into real estate isn’t a shareholder. That’s a different kind of investment.
Shareholders are stakeholders, but stakeholders don’t have to be shareholders. I know that sounds confusing, so let me explain.
Shareholders have a stake in the company from which they’ve purchased shares. This simply means that the shareholder has a financial interest in the company’s success — or, more accurately, the stock’s success.
Stakeholders aren’t always shareholders, though. A stakeholder could be an employee, vendor, partner, or some other interested party that has a stake in the company’s success.
For instance, vendors depend on the company to pay them for their products or services. Employees depend on the company for their salaries.
There are differences between shareholders and stakeholders, but if you’re interested in investing in the stock market, they’re immaterial to this discussion. Just understand that people who don’t buy shares in a company can still be considered stakeholders.
The Bottom Line
If you’ve followed any of my work, you know I’m a huge proponent of the stock market. It’s the reason I’m able to live my comfortable laptop lifestyle and teach other people how to profit from trading stocks.
My bread and butter is pennystocking. Yours might be something else entirely.
Understanding the jargon that surrounds investing was an important part of my early success, and it still informs my every decision. I’ve written hundreds of thousands of words on investing, and if you don’t know what the key terms mean, you’ll get lost pretty quickly.
That’s why I create guides like this. I love the stock market, and I want to teach you how to love it, as well.
Shareholders are intrinsic to the stock market’s success. Without shareholders, there would be no investors for companies to depend on.
Similarly, shareholders don’t always remain shareholders forever. If you want to sell your shares in a stock, you have every right to do so as long as there’s a buyer in the wings.
My passion for this game led me to become a mentor. It’s my way of giving back and helping my students succeed in a market where so many others fail.
I’ve already worked with students who have generated five-, six-, and seven-figure profits from pennystocking and other forms of day trading. Right now, I’m looking for my next success story.
Now that you’re more familiar with shareholders and their role in the stock market, you are ready to give investing a real try…
Editor, Penny Stock Millionaires