Key Takeaways:

  • Stockholders, also called shareholders, are individuals or institutions that own shares in a company.
  • There are two primary types of stockholders: individual and institutional, and they may own common or preferred stock.
  • Stockholders gain rights like voting, dividends, and asset claims but also assume the risk of loss if the company underperforms.
  • Additional categories include majority vs. minority stockholders and active vs. passive stockholders, which influence control and involvement in the company.
  • Understanding the types of stockholders helps businesses manage corporate governance and shareholder expectations.

The types of stockholders, or shareholders, are the different kinds of individuals or institutions that own one or more shares of a company's stock. In large corporations, stockholders invest their money into the business to make a profit. In smaller companies, stockholders tend to be the person who owns the company, or someone who has a personal stake in it.

Stockholders

A stockholder is a person or institution that invests money into a company, owns one or more shares of a company's stock, and acquires ownership in the company through their investment. Companies formed under a corporate entity file a corporate charter with the state government. This document outlines the company's bylaws, stock information, rules, and regulations. The charter lists the approved amount of shares and their value for each investor.

The types of stockholders a company has is dependent on the legal form of the business.

  • A corporation is owned by its shareholders, made up of individuals, LLCs, and/or other corporations. Under a corporate business structure, the company exists separately from its shareholders.
  • An S-Corporation, also owned by its shareholders, prohibits stockholders in the form of corporations, non-resident alien shareholders, and partnerships

The investors become stockholders once the shares are distributed and recorded on the company's balance sheet. Each shareholder receives a stock certificate with the number of shares they own. Depending on how the company performs, a stockholder either makes or loses money on their investment. Company profits are issued to stockholders as a dividend, or a sum of money.

Understanding Stockholder Rights and Responsibilities

Stockholders are more than just investors—they hold a stake in the company and assume both benefits and risks. Depending on the type of shares they own, stockholders may have:

  • Voting Rights: Typically granted to common stockholders, allowing them to vote on directors, mergers, or major corporate decisions.
  • Dividend Entitlements: Both common and preferred stockholders may receive dividends, though preferred stockholders usually have priority.
  • Asset Claims: In liquidation, stockholders can claim remaining assets after creditors are paid. Preferred stockholders are prioritized over common stockholders.
  • Disclosure Access: They are entitled to review certain company financials and reports to monitor performance.

Stockholders also bear risk: if a company performs poorly or enters bankruptcy, stockholders may lose part or all of their investment. Institutional investors often diversify to mitigate this risk, while individual stockholders may be more exposed.

Types of Stockholders

Stockholders are either individual or institutional investors.

  • Individual investors
    • A person who buys stock in a company with their own money.
  • Institutional investors
    • Organizations that buy shares of a company with the money of others.
    • Insurance companies.
    • Pension funds.
      • Invest retirement money.
    • Banks.
    • Investment companies.

Majority vs. Minority Stockholders

Stockholders can also be classified by the proportion of shares they control:

  • Majority Stockholders:
    • Own more than 50% of a company’s shares.
    • Have significant control over board elections, business decisions, and corporate policy.
    • In smaller companies, the majority stockholder is often the founder or a family member.
  • Minority Stockholders:
    • Own less than 50% of shares.
    • Have limited influence on corporate decisions but are still entitled to dividends and legal protections.
    • Can benefit from corporate growth without actively managing operations.

Active vs. Passive Stockholders

Stockholders may also differ in how involved they are in company operations:

  • Active Stockholders:
    • Participate directly in company management or strategic decisions.
    • More common in small, closely held corporations.
  • Passive Stockholders:
    • Invest without participating in daily operations or governance.
    • Common in publicly traded companies where most shareholders simply seek financial returns.

Recognizing these distinctions helps companies balance decision-making power and shareholder expectations.

Common Stock VS. Preferred Stock

Common stock refers to the most common type of stock. As partial owners of a corporation, common stockholders play an active role in the company and have several rights.

  • The right to vote.
    • Stockholders' voting rights are limited to yearly shareholders meetings or special shareholder meetings held by the board of directors. Shareholders are given a notice of the meeting and an agenda outlining the main topics of the meeting.
    • The more shares a stockholder owns, the more voting power they have.
    • The topics a shareholder can vote on varies by state-specific laws and corporate bylaws.
    • Stockholders have the right to vote for a corporate president and its board of directors. Board of directors are a group of elected company officials who govern the business, establish company policies, represent stockholders, and decide on company issues. Shareholders can also vote on important changes to the business such as:
  • The right to review company performance and have access to financial information.
  • The right to purchase additional shares in the company before they are offered to the public.
  • The right to receive common profits.
  • The right to a company's assets during liquidation.
  • Stockholders are legally protected from unethical company behavior or wrongdoing.

Preferred stockholders have the right to a fixed income from dividends that must be paid out before common shareholders. Preferred stock generates a predictable income, whereas common stocks are unpredictable and tend to have larger capital gains or losses. Unlike common stockholders, owners of preferred stock do not have the right to vote and cannot affect business decisions. Types of preferred stock:

  • Preferred dividends
    • Stockholders are guaranteed a fixed dividend rate.
  • Preferred assets
    • Dividends are guaranteed to be paid out before common shareholders.
  • Stocks with both preferred dividends and preferred assets.
  • Redeemable stock
    • Stock that can be repurchased by the company.
  • Convertible stock
    • Stockholders can exchange this kind of preferred stock for common stock.

Additional Stockholder Classifications and Considerations

Beyond stock classes, stockholders may fall into specialized categories:

  • Founding Stockholders: Individuals or entities who originally established the company and often retain influence over major decisions.
  • Employee Stockholders: Employees who acquire shares through stock option plans or incentive programs, aligning their interests with the company’s growth.
  • Institutional vs. Retail Investors: Institutional investors—like pension funds, mutual funds, or insurance companies—often hold large blocks of shares, while retail investors are individual stockholders with smaller holdings.

These categories impact company control, liquidity, and long-term strategy. For example, high institutional ownership can stabilize share prices, whereas active retail trading may increase volatility.

Frequently Asked Questions

1. What are the main types of stockholders? The two primary types are individual stockholders, who invest their own money, and institutional stockholders, like banks or pension funds.

2. What is the difference between majority and minority stockholders? Majority stockholders own over 50% of shares and can control company decisions, while minority stockholders own less and have limited influence.

3. Do all stockholders have voting rights? No. Voting rights are typically granted to common stockholders. Preferred stockholders usually receive fixed dividends but no voting power.

4. What is the role of active vs. passive stockholders? Active stockholders are involved in management or strategic decisions, while passive stockholders primarily invest for returns without daily involvement.

5. How do stockholders earn money from their shares? Stockholders profit through dividends and capital gains if the company’s stock price increases. Preferred stockholders also benefit from fixed dividend payments.

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