Being a shareholder is great and exciting, and I have my hand in a few trading jars. I like to diversify, and as such, I have voting rights in a company or two. However, it has its ups and downs, and people don’t understand that because I own stock in a company, I can have a say in it, or I can make money from it depending on the stock I have bought. So here is an article explaining shareholders and shares.
Shareholders who own ordinary stock have voting rights and can have a say in a range of corporate actions. However, there can be classes and categories of ordinary stock defining guidelines and criteria where you may not be allowed to vote, or you have to meet specific criteria before you can. Preferred shareholders own stock that have non-voting rights. You can also have shareholders who own multiple stock shares, not being limited to a specific type.
In this article, we are going to cover what different types of shareholders you get. Then we will cover all the various types of shares a company can offer to trade once it goes public. And finally, we will look at if having voting shares in a company is worth it and where we find out what type of shares a company is offering to trade on the market.
What Are Shareholders In A Company?
A shareholder (stockholder) is a corporation, institution, person, or government that owns at least one share in a company. Shareholders may own shares or stocks in companies listed on major stock exchanges or unlisted ones such as the OTC.
In essence, by owning stocks in a company, the shareholder owns a percentage of that company, even if that percentage is meager. Hence, shareholders are owners of the company and the ones to whom the company is responsible for its performance.
Shareholders are not personally liable for the company’s obligations. The money that shareholders spend in purchasing a company’s stock is the only risk they have, unlike a partnership or sole proprietorship.
To break this down, if I own ten shares in Apple and I spent $1000 to purchase them, and Apple goes belly up and runs into debt, creditors can’t ask me to pay for Apple’s debt; however, they can do so with partnerships and owners. However, I will probably lose my $1000 that I spent purchasing the shares in that company.
There are two types of shareholders, and only one of them has voting rights. Let’s take a look.
Common Shareholders (Ordinary Shareholders)
Common shareholders have voting rights and receive dividends if the company in which they have their shares makes a profit and the directors decide not to reinvest all of it. These shareholders may also be entitled to have a say in the company and may be able to participate in a range of corporate actions, including but not limited to share buy-backs, issues regarding the company’s future, and issues of new shares.
The downside to being a common shareholder is that they are paid out last. This includes if a company is bankrupt and goes into liquidation. Common shareholders get paid out last, but they do have a claim on any remaining assets.
Preferred shareholders do not have voting rights, and they receive a fixed dividend. Many people who are new to investments believe that starting as a preferred shareholder is a safer way to start than being a common shareholder. This is because no matter if the company is doing well or it goes into liquidation, the preferred shareholders get paid out first.
What Are The Different Types Of Shares A Company Can Offer?
There are many different types of shares a company can offer, and their guidelines can vary in terms of dividends, voting rights, and much more.
These are voting shares, and they carry voting rights (usually one vote per share), and they carry no special rights or restrictions. However, these shares do rank after preference shares, as we stated above with regards to dividends and return of capital. Voting rights are generally not given to preference shares.
Companies may create different classes or categories of ordinary shares because this gives the company flexibility for various dividends (cash or stock dividends) to be paid to varying shareholders.
Furthermore, some classes or categories of ordinary shares may be given different nominal values. An example of this would be if two types of ordinary shares were at different prices. If one share was equal to one vote, then a shareholder who buys shares at $0.1 would have 100 votes than a shareholder who would have one vote purchasing shares at $1.
Deferred Ordinary Shares
This type of share that a company offers will not pay out a dividend until all other classes and categories of shares have been paid out a minimum dividend. Suppose a company is winding up (in the process of dissolving). In that case, they will only receive some compensation once every other entitlement has been met (paying creditors, distributing remaining assets, and paying other shareholders).
Non-Voting Ordinary Shares
Ordinary shares are restricted in some way, and this can come in the form of non-voting shares. These shares have specific guidelines and restrictions that could include not having voting rights, or some criteria or conditions must be met before they carry voting rights.
Other restrictions may include a shareholder not being able to attend a General Meeting; however, they will have the same properties (rights) as ordinary shares in all other instances.
These types of shares offer the company the option to purchase the shares back in the future if they decide to do so. Another option that sometimes rarely happens is that the shareholder may choose to sell their shares back to the company.
Redeemable shares usually come into effect when the shares are in issue, on a specific date, or between two dates. The buy-back price (redemption price) is usually the same as the selling price it was first bought at (issue price); however, it can be set differently.
A company may only buy-back shares it sold out of a new share’s profits or proceeds. This has the ability to restrict the number of shares the company would like to redeem.
One thing to note about redeemable shares is that If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At no point can a company have all of its share capital be made up of redeemable shares.
We discussed preferred shareholders, and these are the types of shares that a preferred shareholder will have. Remember that these shares are generally non-voting shares. These shares have the right to receive first (before ordinary shares) a fixed amount of dividend a year.
The amount of dividend paid out by a company for preferred shares is usually expressed as a percentage of the share’s nominal value. For example, if a share dividend paid out for a preference share is 10% of its nominal value and you have stock in preferred shares at the cost of $100, you will receive $10 a year.
The total dividend (full entitlement) will always be paid every year to its shareholders unless the company’s distributable reserves are insufficient to pay all or even some of it.
When a company winds up (goes into liquidation and starts to sell its assets and pay creditors), preferred shareholders will usually be entitled to any arrears of dividends and their capital ahead of ordinary (common) shareholders.
Cumulative Preference Shares
As a standard rule of thumb is that preferred shares are cumulative. This means that if a company misses to pay out a dividend, then the arrears will be made right when the company next has sufficient distributable reserves.
Furthermore, it will follow that any ordinary shareholders will not receive dividends until all shareholders of cumulative shares are made whole. One thing to note is that companies do offer non-cumulative preferred shares.
Redeemable Preference Shares
As you would have guessed it, these types of shares have the benefits of receiving dividends first before ordinary shares, and then the company has the option to redeem (buy-back) them at some point, which has been stated in pre-agreed terms and if they wish to do so.
Where Do You Find The Different Types Of Shares A Company Offers?
We need to look at a company’s investor relations section of a company profile to determine what shares a company may offer to investors.
Investor relations is a division of a company whose job is to provide investors with accurate information of company affairs and ensure that a company’s publicly traded stock is being fairly traded by disseminating key and valuable information. This information allows investors to determine whether that company is a good investment based on their needs and pursuits.
All the information that you will need regarding the company and the shares it offers will be dealt with and handled by Investor relations. Companies will usually start building their IR department before they go public. This division and section in a company’s profile is where you will need to read the fine print regarding the types of shares a company offers.
Are Voting Right Shares Worth It?
Well, that all depends. As an investor, a company will offer different types of shares, and you have to decide what you would like to do depending on your portfolio and the direction you want to go in.
If you want a say in the company and have a chance to change, reinvent, and move the company forward or in a different direction, then you would be looking to get your hands-on ordinary shares.
If you are all about just making returns and don’t really care what you invest in (Kitty Mugs, Lumo Green Jeans or whatever), preferred stock Is probably a better option. Also, there is somewhat of a lesser risk than that of ordinary shares because preferred shares (cumulative) get first dibs on any dividend returns.
We conclude that there are two main types of shareholders: common (ordinary) shareholders and then preferred shareholders. There are also many different types of stock (shares these shareholders can buy).
However, a common shareholder will have stock in ordinary shares, giving them voting rights in the company. A preferred shareholder has non-voting rights shares but is entitled to initial dividends.
Depending on what you are looking to achieve with your shares, you will need to read closely and pay attention to what shares the company is offering and what you are looking to do with your trading.
One last thing to remember is that a shareholder can have shares in multiple classes. You are not restricted to just being a preferred or common shareholder. Hence, you could get the benefit of different shares depending on what types you invest in.