Companies aren’t just whole entities. They’re made up of tiny parts called shares. Each share represents a certain percentage of the company, and shareholders own those shares.
When you invest in the stock market, you buy shares — essentially pieces of paper that entitle you to a portion of the company’s profits if it makes money. Whether you make or lose money depends on the stock price.
For instance, if a company’s stock is trading at $14 per share and you buy 1,000 shares, you’ve invested $14,000 in the company. Should the stock shoot up to $18, you’ll make money. If it sinks to $12, you lose money.
Investors buy shares of stocks because they want to turn a profit. If they’re like me, they might invest in small companies for hours or even minutes. Others hold on to more expensive stock for months or years.
Regardless, everyone who invests in the stock market trades shares. But what is a shareholder and how does the process work?
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A shareholder is someone who owns shares in a particular stock. People like you and I can buy shares and become shareholders. So can companies and financial institutions.
As long as you own at least one share in a company, you’re a shareholder. You’re also an investor because you’re investing in that company’s ability to earn you a profit.
Stock valuation determines whether or not you make money on any single investment. The market — supply and demand — determines the price per share of a given stock. Many things can influence stock prices, from public interest and news to mergers and acquisitions.
The important thing to know is that, once you buy a share of stock, it’s yours until you decide to sell it.
This also means that you own part of the company. You can’t walk into the CEO’s office and start making demands, nor can you make marketing decisions or decide what products to launch. However, you’re entitled to make money when the stock price increases.
Unlike other interested parties, your ability to profit from being a shareholder is tied directly to stock price and not to any other number. In other words, a company can produce revenue even if the stock price dips. In that case, you lose money even though the company profited.
The shareholders of a corporation are people who own shares in the company’s stock. You can buy shares in myriad ways, from the major stock exchanges to over-the-counter (OTC) electronic trades.
I want to go back to supply and demand because it’s the crux of being a shareholder.
When there are sellers in the stock market, buyers can purchase those shares. Similarly, if you own shares in a particular company, you can sell them as long as there is someone willing to buy them.
It’s no different from a ticket you buy for a concert. As long as the concert isn’t sold out, you can buy tickets, and if you decide not to go to the concert, you can sell your ticket to someone who is willing to buy it.
With both shares and concert tickets, you can’t sell something nobody wants. That’s why you want to get out of a stock — e.g. sell your shares — at an opportune time. I don’t like risk, so I’m conservative when I buy shares of a stock. I encourage you to do the same.
This is a complicated question that has different answers depending on the type of investment. If you’re a shareholder for a public company, you have more rights — but not responsibilities — than if you were a shareholder in a private company.
For instance, shareholders often vote on business matters, help elect the board of directors for a particular company, or help decide how much money directors can earn. Those rights are beyond the scope of this article.
The important thing you need to know is that you have the right to profitability. In other words, if the stock price increases, you can sell for a profit. Furthermore, if you’re involved with long-term investments, you might be eligible for dividends, which I’ll discuss in more detail later.
I’m a shareholder more often than not, but I’m not in it for the long-term investment. Instead, I want quick gains from penny stocks and other very inexpensive stocks. I might buy 3,000 shares of a company for $2.50 per share and sell an hour later for $2.78 per share.
You might take a different strategy. For instance, if you were to invest in Apple, Netflix, or Google, you’d likely hold on to those shares for an extended period of time.
And that’s what shareholders do. They buy and sell shares in stocks they think will make them money.
Companies need money if they want to expand their operations, pay their employees, buy new equipment, or grow into new markets. Most businesses don’t have that kind of cash strewn across their offices.
These corporations sell portions of their companies instead. Each portion — a share — is an investment in the business for the future. The company can use the money it raises through stock market investments to finance their next phase.
There are other ways to raise money, of course. Companies can seek private investors to fund specific projects. If you’ve seen “Shark Tank,” you know exactly what I’m talking about.
Having shareholders can also help attract the best talent to a company. Some businesses use stock as part of their benefits packages. Certain employees receive set amounts of shares in the business. This perk can make a company more attractive to a professional who wants a new job.
There are two basic ways to make money as a shareholder. One involves a long-term approach (dividends) and the other can involve both long- and short-term strategies (capital appreciation).
Before I go on, I want to make clear that you don’t always make money as a shareholder. You can lose your entire investment and, depending on the type of position, even lose money.
Just a few days ago, for instance, I bought several shares of stock at a decent price. I saw the bounce coming, and I intended to wait it out.
The stock price dipped, and I had a choice to make. I could sell at a loss or wait and see if it would bounce back up.
Based on my experience and my forecast, I decided to take Door Number Three instead. I bought more of the stock because I believed it would pay off. And it did. I would up making more money than I intended in the first place.
But that doesn’t always happen. An investment isn’t a loan, so you’re not guaranteed repayment — and certainly not with interest.
Can you make money? Absolutely. I’m living proof. But you need a strategy.
Dividends
Dividends are monies paid to shareholders based on a company’s earnings. Dividends can arrive monthly, quarterly, or annually, and usually come in the form of cash.
When you get dividends in the form of additional stock, they’re called stock splits. Cash dividends, however, are far more common.
The general idea is that a company divides its earnings equally among its shareholders based on how many shares each individual or entity owns. For the sake of a simplistic example, if you owned 20 percent of a company’s shares, you’d receive 20 percent of its dividends.
Major stock exchanges often get a large portion of their returns from dividends. Although capital appreciation still wins the lion’s share, it’s not a good idea to discount dividends as a potential profit source.
A company pays dividends to attract more investors. If you knew that you could profit at regular intervals just for owning shares in a company, you’d find that investment more attractive than if you were just banking on stock price appreciation upon selling your shares.
Capital Appreciation
This is the bread and butter of the stock market. It can happen in a very short time frame — down to the seconds — or it can take place over a long period of time.
Capital appreciation refers to the increase of a stock’s price. Conversely, capital depreciation describes a dipping stock price.
As an investor and shareholder, you want to earn money on your investment. As shares become more expensive, you stand to earn more money, and you can divide your investment capital over as many stocks as you wish.
If you want to become a shareholder in a particular company, you’ll need a broker account and an initial capital investment. The amount of “starter” money you need depends entirely on the types of stocks you wish to buy.
For instance, I got my start in penny stocks with just over $12,000 — money saved from my childhood. Others have gotten started with as little as $500.
If you want to trade blue chip stocks, you’ll need far more money. Many brokers won’t approve your application unless you have at least $20,000 or $30,000 to put into your account.
Brokers can have other requirements, too.
For instance, many won’t approve applications unless the applicant has a minimum net worth or annual salary. This is to maintain the integrity of the brokerage account.
Brokers might ask you what your trading goals are and what type of trading strategies you intend to use. They use your answers to decide whether or not you’re a good fit for their firm.
You must then place a buy order through your broker. For example, you might want to buy 100 shares of ABC stock at $10 per share. That will cost you $1,000. Your broker will also charge a commission, which you must add to the total amount of money you’ll set aside in your brokerage account.
You can decide whether to buy the shares at market price or to place a limit order, which means that you only want to buy shares of that stock if the price hits a certain point.
The roles of shareholders depend on the type of shareholder in question. If you’re simply trading stocks on the stock market, you don’t have a role beyond buying and selling. That’s the easiest — and, in my opinion, most profitable — way to get started with investing.
Shareholders can also be owners, founders, or employees at a company. In this case, they have far greater roles because they’re involved with the business’s operations.
Even vendors can be shareholders. A company might enter into a barter-type agreement in which the vendor supplies his or her products or services for a specific time in exchange for X shares in the company.
A shareholder agreement creates a contract between the people who own shares in a particular stock and the company behind the stock. It addresses issues like the rights and obligations of both parties.
Standard shareholder agreements also contain information about how a company should be run, such as the process for electing the board of directors and determining salaries for directors. If you’re investing in the stock market, you don’t need to worry about any of these details.
There are two types of shareholders or stockholders. The first is a common stockholder and — as you might have guessed — is the most common arrangement. If you’re buying shares of a stock on the stock market, you’re a common shareholder.
Preferred shareholders, on the other hand, have a different arrangement. They typically get paid greater dividends and at more frequent intervals.
As I’ve mentioned before, my goal when investing in the stock market is to turn a quick profit. This is commonly known as day trading, and it doesn’t involve any long-term strategies for watching stock prices ebb and flow.
Even though it’s called day trading, my trades often last only minutes. The only qualification for day trading is that you buy and sell your shares of a specific stock between the open and close of the market.
Other shareholders take a long-term approach. They’re saving for retirement, for instance, and they want to profit from dividends of major corporations, then get a big payout when they eventually sell their shares for a premium.
This isn’t my style, but there’s nothing wrong with it. I just recommend educating yourself on long-term trading before you make your first purchase.
There are some shareholders who have greater interest in the company behind the stock. They might want the opportunity to influence company policy, for instance, or sway corporate social responsibility. These investors tend to buy larger stakes in companies, and they’re often experts in risk mitigation.
Frequently Asked Questions
I get a lot of questions from people who are new to the stock market and confused about shareholders. Let me address the most common questions here so you have a handy reference.
Anyone who has the money to invest in shares can become a shareholder. There are numerous online brokerages that allow you to set up an account in minutes, and even if you only have a small initial investment, you can start with penny stocks or similarly inexpensive shares.
Does this mean you should be a shareholder? Not necessarily. If you’re not familiar with the stock market and how it works, I caution you to hold off. Join my Trading Challenge, read widely about investing in stocks, and find a mentor who can teach you the ropes.
I’ve seen far too many people jump head first into the stock market and take a huge fall. I don’t want that to happen to you, so make sure you know what you’re doing before you put in your first buy order.
Who Determines Stock Prices?
The stock price is determined by supply and demand. Many factors can influence the price of a stock.
For instance, if a company suddenly announces an acquisition of another company, its stock price is likely to climb. An acquisition suggests fiscal health to investors, so they’ll want to get their chance to profit off the announcement.
Negative news or financial reports can cause a stock’s price to plummet. Additionally, so-called gurus often announce “hot” stocks in which to invest, which can temporarily inflate stock prices. Only the guru benefits in that case.
Finally, buyers and sellers decide the prices at which they’re willing to conduct transactions. Some investors are willing to pay market price, while others have mental stops or use limit orders.
Shareholders, investors, and stakeholders have quite a bit in common, but they’re not the same things. Let’s break it down a little.
A shareholder is someone who has purchased one or more shares of a given company. That’s it. If you buy one share of APPL (Apple), you’re a shareholder in Apple, Inc.
Investors are people who use liquid cash to invest in companies, government agencies, and other opportunities for the purpose of making a profit. A shareholder is typically considered an investor because his or her desire is to make money. However, an investor who puts money into real estate isn’t a shareholder. That’s a different kind of investment.
Shareholders are stakeholders, but stakeholders don’t have to be shareholders. I know that sounds confusing, so let me explain.
Shareholders have a stake in the company from which they’ve purchased shares. This simply means that the shareholder has a financial interest in the company’s success — or, more accurately, the stock’s success.
Stakeholders aren’t always shareholders, though. A stakeholder could be an employee, vendor, partner, or some other interested party that has a stake in the company’s success.
For instance, vendors depend on the company to pay them for their products or services. Employees depend on the company for their salaries.
There are differences between shareholders and stakeholders, but if you’re interested in investing in the stock market, they’re immaterial to this discussion. Just understand that people who don’t buy shares in a company can still be considered stakeholders.
The Bottom Line
If you’ve followed any of my work, you know I’m a huge proponent of the stock market. It’s the reason I’m able to live my comfortable laptop lifestyle and teach other people how to profit from trading stocks.
My bread and butter is pennystocking. Yours might be something else entirely.
Understanding the jargon that surrounds investing was an important part of my early success, and it still informs my every decision. I’ve written hundreds of thousands of words on investing, and if you don’t know what the key terms mean, you’ll get lost pretty quickly.
That’s why I create guides like this. I love the stock market, and I want to teach you how to love it, as well.
Shareholders are intrinsic to the stock market’s success. Without shareholders, there would be no investors for companies to depend on.
Similarly, shareholders don’t always remain shareholders forever. If you want to sell your shares in a stock, you have every right to do so as long as there’s a buyer in the wings.
My passion for this game led me to create the Trading Challenge. It’s my way of giving back and helping my students succeed in a market where so many others fail.
I’ve already worked with students who have generated five-, six-, and seven-figure profits from pennystocking and other forms of day trading. Right now, I’m looking for my next success story.
Now that you’re more familiar with shareholders and their role in the stock market, you might want to give investing a try. By applying for the Trading Challenge, you get the opportunity to learn directly from me and from my most successful students.
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