Shareholders, also known as stakeholders, are any individual or institution that holds one or more shares in a company.
Shareholders are the owners of the company for which they hold shares, and these shares confer certain rights and privileges to the shareholders, as well as a chance of return on equity.
Example of Shareholders
Suppose that a day trader purchases 100 shares of common stock in Company A. For as long as these shares are in the brokerage account of the day trader, they are a shareholder in Company A and are afforded all the rights and privileges for the shares that they own.
When the day traders sells the shares of Company A, they are no longer a shareholder in this company and lose all rights and privileges associated with the ownership of these shares.
There are two general types of shareholders: one for preferred shares and one for common stock.
Common stock represents the every day shares that are traded openly on most exchanges, and which are quoted as the representative shares when the company’s shares are referenced. Common stock confers voting rights and dividends, as well as various other potential rights and privileges.
The Importance of Shareholders
The institution of shareholders is at the core of modern capitalism.
The distributed ownership of public companies to a large number of unrelated and profit-oriented shareholders means that modern companies must compete to maximize profits, which is in contrast to the institutional bloating and self-aggrandizement of executives that is seen in many companies in less developed nations.
Shareholders act as a check on the potentially sub-optimal behaviors of company management and executives, which leads to the greatest possible social welfare produced by the company.
Even companies that are privately owned must compete with these public companies, which forces them to adopt some or all of the most efficient practices in the market produced by the widespread use of the shareholder institution.
There is a growing trend of dual-class share ownership in contemporary markets, particularly in the technology sector, which limits the traditional powers of shareholders and concentrates decision-making in the hands of one or a small number of executives, usually the founder or founders of the company.
This trend is young enough that its full impact is still unknown, but it has many critics among financial professionals who believe that it allows executives too much capacity to satisfy personal desires instead of concentrating on profit-maximization.
Shareholders and Trading
Day traders can create profitable positions by discovering who the large institutional investors in certain companies are and forecasting their reactions to certain events.
Many institutional investors are constrained by publicly-available trading strategies and known beliefs and ethos, which makes them potentially predictable in certain scenarios.
Shareholders are the cornerstone of modern capitalism.
Day traders should follow the developments in the new trend of dual-class ownership of public companies, as this phenomenon has the potential to dramatically alter the operation of companies and markets in advanced capitalist economies.