Shareholder: Ownership in Corporations, REITs, and Mutual Funds

August 25, 2024 4 min read Finance Investments Corporate Governance Shareholder Corporate Ownership REITs Mutual Funds Investment

An in-depth exploration of shareholders, their rights, types, roles, and significance within corporations, REITs, and mutual funds.

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A shareholder, sometimes referred to as a stockholder, is an individual or entity that legally owns one or more shares of stock in a corporation, real estate investment trust (REIT), or mutual fund. Shareholders collectively own the company, with their ownership evidenced by stock certificates or entries in the company’s books, signifying a portion of ownership.

Types of Shareholders

Common Shareholders

Common shareholders own common stock, which usually comes with voting rights, allowing them to influence corporate policies and decisions. They also have potential to share in the company’s profits through dividends and capital appreciation.

Preferred Shareholders

Preferred shareholders hold preferred stock, which often does not carry voting rights but has a higher claim on assets and earnings than common stock. They receive dividends that are usually fixed and paid before common shareholders receive theirs.

Shareholder Rights

Shareholders generally have several key rights:

Voting Rights: Common shareholders typically have the right to vote on major corporate decisions, such as electing the board of directors.
Dividend Rights: Shareholders may receive a portion of the company’s profits in the form of dividends.
Ownership Rights: This includes the right to a proportionate share of the residual value of the company’s assets upon liquidation.
Transfer Rights: Shareholders can transfer their shares to others.

Special Considerations

Real Estate Investment Trusts (REITs)

REITs allow investors to pool their resources to invest in large-scale real estate ventures. Shareholders in REITs benefit from the income generated by the properties, which must distribute at least 90% of taxable income to shareholders as dividends.

Mutual Funds

In mutual funds, shareholders own a portion of the fund that, in turn, owns a diversified portfolio of securities. Investors benefit from the diversification and professional management of the fund.

Examples

Corporation Shareholder: Jane owns 100 shares of XYZ Corp. She attends annual general meetings and votes on key issues affecting the company.
REIT Shareholder: John invests in a REIT that owns and manages commercial properties. He receives quarterly dividends from the rent collected.
Mutual Fund Shareholder: Sally invests in a mutual fund that holds a diversified mix of equities and bonds, benefiting from professional management.

Historical Context

The concept of shareholders dates back to the early 17th century with the establishment of the Dutch East India Company, the first company to issue stock. This innovation allowed for the accumulation of capital and the sharing of risks associated with large ventures, paving the way for modern corporations.

Applicability

Shareholders play a crucial role in corporate governance, influencing the strategic direction of the company through their voting rights. Their investments provide essential capital for growth and operations, and they benefit from the corporation’s success through dividends and capital gains.

Comparisons

Shareholders vs. Bondholders

Ownership vs. Debt: Shareholders own part of the company, while bondholders are creditors.
Dividends vs. Interest: Shareholders receive dividends, whereas bondholders are paid interest.
Risk: Shareholders assume greater risk, as they are paid after bondholders in case of liquidation.

Board of Directors: The elected group responsible for overseeing the company’s management.
Proxy Voting: A method allowing shareholders to vote on corporate matters without being physically present.
Earnings Per Share (EPS): A measure of a company’s profitability, indicating the portion of earnings attributable to each share.

FAQs

What is the role of a shareholder?

Shareholders play a fundamental role in corporate governance by voting on key issues and electing directors, providing capital for business operations, and sharing in profits through dividends.

Can shareholders sell their shares?

Yes, shareholders can generally sell their shares on the stock market or through private transactions, subject to the company’s regulations and market conditions.

Do all shareholders receive dividends?

Not necessarily. Whether shareholders receive dividends depends on the company’s profitability and dividend policy. Preferred shareholders are usually prioritized over common shareholders for dividend payments.

References

“The Modern Corporation and Private Property” by Adolf Berle and Gardiner Means
“Investment Analysis and Portfolio Management” by Frank K. Reilly and Keith C. Brown

Summary

A shareholder is a crucial entity in the financial ecosystem, providing capital and governance to corporations, REITs, and mutual funds. Through ownership of shares, shareholders gain various rights and benefits, including dividends and voting privileges. Understanding the types, rights, and roles of shareholders helps in grasping their significant impact on corporate governance and the broader economy.