A shareholder is a person or entity who owns shares of -- and therefore, an ownership stake in -- a company. There are two types, and common shareholders have different rights and privileges than preferred shareholders.
When you buy a stock, you become a shareholder. This means that you suddenly have an ownership stake in that company; and for this reason, you’ll be given special rights and entitlements relating to that business. These privileges vary depending on whether you’re a common shareholder or a preferred shareholder.
Of course, the biggest benefit is making oodles of money when the company and its stock perform well. But common shareholders have other advantages, too. They can vote on important company issues such as board elections or whether a stock split should take place. They also have the right to examine the company’s books, and they can sue management if they discover any unauthorized funny business.
Plus, if the board decides to pay out dividends, common shareholders are entitled to receive them. Technically, dividends can be paid in the form of cash, property, or stock, but most often, they’re paid in cash. How big or small they are typically depends on how well the company’s doing at the time.
Unlike their common counterparts, preferred shareholders automatically receive a fixed dividend with their stock ownership. And although preferred shareholders don’t have the voting rights that common shareholders do, they do have one very important advantage: If a business goes bankrupt and has to liquidate its assets, it will pay off its creditors, bondholders, preferred shareholders … and only after all of these folks have received their money will common shareholders get their ownership stake. This is an important detail to keep in mind, especially when investing in a high-risk business.