Which of the 2 Types of Shareholders Are You?
In the last issue I told you how you can make money as a shareholder. I also touched on the role shareholders play in a company.
Because let’s face it, if this is something you’re considering, you need to know all the facts.
Even if you aren’t considering being a shareholder yourself, you need to understand how they impact the world of investing.
So today I’ll wrap it up by going into the types of shareholders out there.
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.
Now that you’re more familiar with shareholders and their role in the stock market, you might want to give investing a try.
— Tim Sykes
Editor, Penny Stock Millionaires