Definition of Stockholder
A stockholder can be defined as any person either individual, company, or any other form of the organization holding an investment in stock of any public/ private company which may either be preference shares having preference in dividends payment, asset, etc. or equity shares having voting rights an share in profits of the business (equity shareholders are considered as owners of the company).
Explanation
A stockholder is a person having one or more shares of an organization’s stock. The holder may be a person, entity, or company. Holding a stock represents ownership of the property to the extent of its holdings, but he/ she considered as a separate entity from the organization Being a separate legal entity, shareholder have limited liability to the extent of capital contributed to pay off the company’s obligations. As the stockholder is the owner of the business he is entitled to the business profit, incentives, and success. And on the other hand, they bear the risk of adverse business conditions like when the company suffers a loss. This may lead to a fall in the market price of the stock, which in turn make the shareholder lose his money or maybe downfall in the value of his portfolio. Whatever may be the case the shareholder personally is not held responsible for the debts and responsibilities of the organization. Shareholders’ liability is limited only up to the amount of capital contributed.
Role of Stockholder
Stockholders are business owners and play an important role in the organization as follows –
- Stockholder having voting rights are responsible for the appointment and removal of directors,
- Deciding the amount of director’s remuneration as how much a director must be paid as salary/ consultancy charges. This practice is very brainstorming as the stockholder must make sure that the amount they will pay is compensating the expenses and cost of directors.
- There are certain decisions which require prior shareholders approval listed as follows:
- Changing the company’s constitution
- Declaring dividend
- Approving financial statements of the company
- Wind up under voluntary liquidation
Types of Stockholders
There are basically two types of stockholders:
1. Common Stockholders
Common stock or equity stockholders are the owners of the company They enjoy voting rights, participates in meetings and can control the company’s operations. They are reimbursed with the payment of dividends after making payment to preferred stockholders. Common stockholders are the important investors of the company and are a major source of funds. These are also known as ordinary shares or equity shares or residual owners of the company.
2. Preferred Stockholders
Preference stockholders are shareholders having preference over dividend payments and claim settlement over common stockholders. Preference stockholders may receive a fixed dividend and are paid before the common stockholders. In case of liquidation, the preferred stockholder’s claim will be settled first prior to the common stock from the assets realized. These shares do not have any voting rights and therefore are not considered as owners of the company.
Duties and Responsibilities of Stockholder
Shareholders do not directly participate in the company’s day to day business. Shareholders appoint a board of directors who in turn further participate in the day to day business management and other major decisions like financing, capital budgeting or business expansion, etc. The election of the board of directors is considered as a topmost important duty of shareholders as these elected board will decide the future course of the company’s operation.
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Shareholders also act as a source of funds for the company. With the help of these funds, the company starts its operations. Accordingly, timely payment of called up amount as and when called up by the company becomes an important duty. Deciding the dividend declaration is another important duty of shareholder. Shareholders determine the future course of action for earned profits i.e. whether to declare and distribute profits as dividends or to reinvest it in business expansion. At the time of liquidation of the company, shareholders are considered as responsible for payment of company liabilities. But this liability is restricted up to the amount of capital contributed by them. Being a separate legal entity, there does not exist any personal liability of shareholders.
(Please note majorly all of the above discussed points relates to equity shareholders. Preference shareholders does not posses such roles and responsibilities.)
Stockholder Equity
Stockholder equity commonly known as shareholder equity or shareholders fund is the sum total of the share capital, retained earnings other reserves, and surplus. In other words, it can be defined as the sum total of all assets available reduced by external liabilities. Stockholders’ equity includes common stock, retained earnings, paid-in capital and treasury stock. It is useful financial term and is used as a means of analyzing the funds retained within the business. If it is negative, this means the company is not operating profitably and is incurring losses.
Stockholder Equity = Assets – Liabilities
Stockholder equity is affected by several components like-
1. Share Capital
Share capital is the initial amount invested by the company’s shareholders. The share capital may change with time with public offerings. It is reported in the balance sheet under the shareholder’s equity section. The maximum amount that can be raised through share capital is the amount of authorises share capital. This is the initial amount of capital invested by shareholder/ owners of the entity in the form of cash/ property or in any other form and is a security that represents the ownership of a company. Common stockholders vote for the corporate policies and elect the board of directors. Equity ownership yields higher returns in the long term. These holders of common stock have rights to assets at the time of liquidation once the preference shares holders, bondholders, and other debts are paid off. Common stock is assessed with a higher risk than preference shares and bonds as they are the ultimate owners of the business.
2. Retained Earnings
Retained earnings can be defined as the balance of net profits which are retained in business after the distribution of dividends to its shareholders. Determining the amount of profits to be retained in business or distribute to shareholders is decided by the company’s board of directors with shareholders’ consent.
3. Other Reserves and Surplus
All other reserves and surplus which gets accrued like security premium reserve (amount called up over and above equity share par value), capital reserve, other statutory reserves also forms part of shareholders equity.
Conclusion
A stockholder can be defined as a person having shares which either signifies ownership rights of business (equity shareholders) or preference shareholders having preference over equity shareholders in any sort of distribution from company. These are considered as sources of funds for company. Companies that do not want to hold a high leverage position (high debt position) goes for funding its company’s requirement through share capital issue. Stockholders enjoys certain rights and also plays an important role indirectly in the company’s business operations.
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