Types of Stockholders: Everything You Need to Know
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.3 min read
2. Types of Stockholders
3. Common Stock VS. Preferred Stock
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.
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.
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.
- Investment companies.
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.
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