There are several ways for a company to raise funds to keep its operations running. Either the owner brings in their own capital or they take a loan from a financial institution.
Both of these options are not always viable, though. Banks only lend money if a business or the owner has a good credit score. If you don’t have one, that option has to be ruled out.
In such cases, the only way out is to go public and float shares.
What is a share and what makes a person a shareholder?
Let’s discuss this in detail.
What is a share?
In its most basic form, a share is an ownership certificate. When a company is short on funds, they reach out to the general public and get them to invest in the company. To do so, you need to buy a share in the company. This establishes your partial ownership in the company.
For example, if each share for a corporation sells for $20 and the company wants to raise funds worth $100. They will float five shares via an initial public offer (IPO). Each of the five people who buy these shares will then become shareholders and have certain rights over the company. In return, the company will give them a fixed pre-decided yearly dividend as an earning.
What are your rights as a shareholder?
Your rights as a shareholder vary from one company to another, and are clearly stated in the company’s annual reports. You have every right to vote on major decisions of the company e.g. choosing the new chairman, board of directors.
The greater the number of shares you own, the higher your voting power. It’s also your right to access company records, financial statements, and all other relevant reports. In times of liquidity, you have a right to claim some portion of the company’s liquidated assets.
Shareholders can also file lawsuits against the company for unlawful practices and acts.
Common shareholders vs. preferred shareholders
Some rights depend on whether you own common or preferred shares.
Preferred shareholders have no voting rights and no say in how the company will be run.
On the bright side, they’ll be the first ones to get paid if the company opts for liquidation. Preferred shareholders get a fixed amount of dividends, whereas it varies for common shareholders. Dividends for preferred stocks are also higher than the same for common shareholders.
Another benefit of being a preferred shareholder is that if the company decides to ‘call back’ or redeem the share, you’ll be able to sell it for a premium.
However, common stocks are still more commonly sold and traded. They’re referred to as true shareholders since they can exercise control over major decisions of the company. Common shareholders also benefit from better long term gains and profits.
To learn more about how to start investing in stocks Raleigh NC, head over to the website of US Stock Advisor and sign up for their Raleigh stock trading course.
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