What Is The Benefit Of Having Shareholders?

What Is The Benefit Of Having Shareholders? | Advantages And Disadvantages

What Is The Benefit Of Having Shareholders?

Advantages and Disadvantages of having shareholders

Why the stockholders are important in the investment and business world?

Who is a shareholder?

Who owns the company?

In a company, the shareholders are the owners of the company and are usually someone who has bought a certain percentage of the company's stock.

What Is The Benefit Of Having Shareholders

By buying a certain percentage of the company, the shareholders are able to have a say in the running of the company.

They get votes in the annual general meeting, who is the president, vice president, and other officers. The percentages that they own are not known by the company, however, it is widely believed that 10% to 20% are typical.

What Is The Benefit Of Having Shareholders, The shareholders are the ones who can make decisions regarding the running of the company, it is their responsibility to put in a check on any excesses of the company or any illegalities of the company.

By putting in their money in the company, they can be assured that their money is safe in the company as the company cannot afford to risk the money of the shareholders.

Purchase Of Assets

It is common that the company uses the money of the shareholders to invest in new business and to purchase of assets that will bring more income for the company.

For example, the company may purchase a new factory that will earn the company a huge dividend. If the shareholders want to get their share of the dividend, they have to buy the shares from the company or exchange.

Dividend

If the shares are kept inside the company, they can keep waiting and see if the dividend will arrive or not. If the dividend does arrive, they get to keep it and the company has to distribute it to the other shareholders according to their percentage of the stock.

What Is The Benefit Of Having Shareholders, The company may choose to distribute dividends to the whole company or to each specific group of shareholders depending on their contribution to the company's success.

Equity

In this way, shares become an important tool of financing companies for expansion and development.

There are many companies that have many shares, but they cannot finance their expansion by means of dividends alone. For this purpose, the company may issue equity to the shareholders.

Equity is a term that has many definitions but in general, it means shares of the company that the shareholders have bought as a form of contribution to the business.

What Is The Benefit Of Having Shareholders?Contribution

For example, the company “ABC Company” has 200 shares that the shareholders have bought at $10 each and they have to put in $10,000 to cover the operating expenses and growth.

So the company issues 10% of its equity to the shareholders as a form of contribution towards expansion.

There are two types of equity: Common Equity and Preferred Stock.

This type of equity is the shares of the company that is freely available to all shareholders.

The common equity is free for transfer (FTT). For example, shareholders can sell their common equity at any time to generate income for their business.

Preferred Stock

What Is The Benefit Of Having Shareholders, The preferred stock is a form of equity that the company has to pay to the shareholders. The shareholders get to keep part of the profit from the business, but the company owes the shareholders a certain amount of money based on the equity value of the shares.

This type of equity gives a special position to the shareholders to gain profit out of the company's growth. The shareholders are not obligated to use the money for growth but they can make profits from the dividends.

Shareholders

Shares of stock are important since they give the shareholders a chance to have a part of the company's profits. The problem arises when the company makes a loss and needs to pay the shareholders.

What Is The Benefit Of Having Shareholders, When the company makes a profit, it spreads the profit equal to the equity holders in the form of dividends. If the company makes a loss, it may have to sell some of its shares to pay its debt. The shareholders will still get a part of the profit from selling the shares.

In this case, the shareholders can have a lesser profit if compared to what they would have if the company has made a profit and paid its debt.

Distribute It To The Shareholders

Companies distribute some of the earnings from the business to shareholders as dividends. The company has to calculate how much profit it makes and distribute it to the shareholders.

There are formulas that help the company determine how much it makes in a certain period of time. For example, the company may make a million dollars in a month and distribute fifty thousand dollars to the shareholders in that same month.

Based on the formula, the shareholders are issued a certain amount of common shares (equity).

Expiration Date

The equity does not have an expiration date, unlike the shares that have an expiration date. The stockholders can hold on to their shares for as long as they want.

The stockholders can sell their shares to another shareholder anytime they want.

Notice To The Shareholders

However, the company must issue a notice to the shareholders about the sale and its reasons for doing so. For example, the company may issue a notice because it sells some of its shares to pay for a contract or it sells some of its shares to raise money for expansion.

When the company issues dividends to the shareholders, they are distributed to the stockholders on the date of the dividend.

Usually, the company issues a notice of dividend to the shareholders on the 3rd Tuesday of the month. The company may decide to distribute the dividends on the 3rd Tuesday of the month or the third Tuesday of the month after the date of dividend announcement.

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