What Is a Company Shareholder?

Shares are bought and sold in auction format, going to the highest bidder.
Shares are bought and sold in auction format, going to the highest bidder. (Image: Stockbyte/Stockbyte/Getty Images)

If you wish to become a business owner, you can line up investors, hire a lawyer to help you apply for all the proper permits, and then you can get to work, perhaps seven long days per week. If that does not sound appealing, there is a much simpler alternative. You can buy stock in a publicly traded company and become a shareholder.

Stock Share Basics

A stock share is the smallest unit of ownership available in the company that issues it. When you buy a stock, you become a company shareholder, which allows you to participate in the company's growth and provides you with certain rights. Your primary right as a shareholder is a claim on everything the company owns. Keep in mind that as a shareholder, you share the company with other investors, who also share the same claim.

Types of Shares

There are two basic types of stock shares, common and preferred. Common stockholders are provided the right to vote at shareholder meetings as well as receive dividends if the company pays them. Preferred shareholders do not have voting rights, but unlike common stockholders, they receive guaranteed dividend payments four times per year. In addition, if the company files for bankruptcy and must sell its assets to pay creditors and investors, preferred shareholders receive their cut first, usually leaving nothing for common shareholders.

How Shareholders Are Paid

When a company you own stock in earns a profit, you as a shareholder share in its success. There are three basic ways you can be paid. A company can choose to distribute earnings in the form of cash dividend payments. Some companies, however, choose to reinvest earnings back into the company with the hope of achieving even greater growth. In this instance, you are usually paid by an increase in share price, which usually occurs when companies earn money. Finally, the company can use the money to repurchase stock shares, shrinking the pool of shares outstanding. When the company does this, the percentage of ownership each of your shares represents increases, which also usually leads to an increase in share price.

Advantages of Share Ownership

The primary advantage of owning company shares is the reward potential they offer. There are many different products competing for your investment dollars, including bonds, government Treasuries, real estate and more. Stocks, as a class, have historically outperformed all other investments over time. According to Yahoo! Finance, since 1926, stocks have earned investors over 10 percent per year.

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