What Are the Privileges of Common Stockholders?
Original post by Geri Terzo of Demand Media
One of the greatest privileges of becoming a common stockholder is obtaining partial equity ownership in a company. Common stockholders are able to affect the future direction of a business by casting votes for certain events. Ultimately, shareholders vote in the direction that they believe will benefit a business the most and in a way they expect will drive a stock price higher. Common stockholders accept risk because there is no guarantee that a stock's value will rise, but in doing so may be generously rewarded with profits.
Common shareholders can vote on important changes unfolding at a company. Shareholder votes in major corporate occurrences, such as a merger, are coveted by corporate executives and majority stockholders. For example, when a merger between Allied World Assurance Company Holdings and Transatlantic Holdings was announced in 2011, shareholders held the fate of the deal in their hands. A third-party proxy consulting firm advised Allied World shareholders to welcome the deal. The same agency sent a mixed message by recommending that Transatlantic shareholders reject the merger and wait for a better offer.
Common stockholders receive a portion of the profits that the company generates. There are different events that can cause the market value of a stock to rise, some of which may be company specific, and others that can stem from the economy. If common stockholders look hard enough, there are usually some gems even in a down market. In 2011, when major stock market averages struggled to stay ahead, the low-cost retail segment managed to deliver double-digit gains.
Common stockholders can earn additional income from common stock dividends. These income distributions are made from profits a company earns during a given period. Dividend payments are not guaranteed, but many investors are still able to rely on these distributions for a steady stream of income. Historically, investors purchased industry leading stocks with a record of paying out dividends to finance major events including retirement. In 2010, that investment theme resurfaced as the yields from dividend-paying stocks outpaced performance in certain debt securities in the fixed-income markets.
Common stockholders who obtain a large enough stake in a publicly traded company can initiate changes at the organization. For example, after acquiring nearly 5 percent in stock of technology company Iron Mountain Inc, hedge fund Elliott Management prepared to insert several of its own choices for board members at the company. To do this, the hedge fund would need the support of shareholders. Iron Mountain responded defensively, and in April 2011 prepared to appoint one of the hedge fund's recommendation to its board of directors.
- Business Wire; ISS Recommends Allied World Shareholders Vote in Favor of Merger With Transatlantic; September 2011
- "Los Angeles Times"; Common Stock Dividends, An Old Idea for Retirement Income, Are In Vogue Again; Tom Petruno; April 2010
- Boston.com; Iron Mountain Compromises With Activist Investor; April 2011
- Boston.com; In Bad Times, Discount Retail Stocks Hold Up; Mark Jewell; September 2011
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.
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