Shareholder Types

Shareholders are individuals or organizations with a residual claim or financial claim over the business's assets and can be bifurcated into two broad types: common shareholders and preferred stakeholders. In addition, further classification of shareholders could be performed on a class basis, such as Class A, Class B, Class C, etc.

Broadly, the shareholders can be classified as preferred stockholders and common shareholders.

#1 - Common Shareholders

• The common stockholders are shareholders that generally hold common stock issued by the business and are entitled to dividends declared by the company at regular intervals.
• The common shareholders generally have voting rights to nominate board members of their choice to the company's board or management. If the business makes a huge profit, common shareholders may earn dividends at a higher rate, which could be more than the fixed rate of dividends earned by the preferred stockholders. They are always in the majority, whereas preference shareholders are few. The common shareholders additionally hold the right to sue the business in the event of any potential wrongdoing as exhibited by the company.
• The common stock can be termed as the security that represents financial claim or ownership of the assets the business holds. The preferred stock can be called the security that describes the ownership of the company's assets. However, the priority of claim over the business assets is generally ranked higher over the common stock.

#2 - Preferred Shareholders

• The preferred shareholders are called the second type of shareholders. They are regarded as owners and investors, but they generally enjoy preferential status over the common stockholders as bestowed by the business. They typically hold preferred stock, which is nothing but hybrid security displaying equity and debt features.
• They are entitled to dividends at a prescribed fixed rate similar to the interest component of debt. They get dividends whether or not the business makes a profit for the given financial year. The common stockholders receive dividends if the company has made some profits for a given financial year.
• In liquidation of the business, the preference stockholders normally have the first right to the business assets after the debt holders but before the common equity holders. However, the preferred stockholders generally don't hold any voting rights utilized for the appointment of the board of directors.
• The preference stock can be regarded as senior claims, and common stocks can be considered junior claims. The issuance of preference shares generally provides protective provisions that prevent the company from creating preference shares that are senior to the existing issues. Therefore, when a business underperforms, the common stockholders do not get any dividends and have to bear the full risk.
• The preference shareholders get their dividend payments on time whether the business outperforms or underperforms. They generally don't bear that level of risks that the common shareholders bear, and they typically hold a secured position concerning the company.
• Regarding the cost of issuing common and preferred equity, common equity is a cheaper and more viable financing option than the preferred equity option. The quality of common stocks is not rated by the credit rating agencies, whereas the credit rating agencies always rate the preferred equity. The company or business generally issues preferred equity to prevent hostile takeovers.
• The preferred stockholders may have conversion features embedded in them, which are generally exercised whenever there is an imminent change in the management, and hence, they transform into poison pills. The common stock typically does not have such features in place. The users of the preferred stocks may be venture capitalists who have initially funded the business with seed or start-up capital and generally have an interest in retaining preferential status in the company.

The business normally has two types of shareholders. They can be classified as preferred stockholders and common stockholders. The common stockholders are large in the count, whereas preferred stockholders are few.

This article has been a guide to Shareholder Types and their definition. Here we discuss the top 2 types of shareholders and provide a detailed explanation. You may refer to the following articles to learn more about finance –

• Shareholder Primacy
• Nominee Shareholder
• Shareholder Resolution
• Preferred Shares
• Preferred Dividend