PennyPlayer

Stock, to be literally defined, is generally an inventory or a store of goods for sale, a supply of any kind that can be used for generating benefits in a form of capital. But in the world of finance that involves many big, renowned commercial corporations, stock is referred to the capital raised by a company through the issue of shares, or the total of shares held by a single shareholder. And these particular companies that are formed through partnership are sought to improve shareholder value.

These shareholders can be a group of individuals or companies as a whole. A shareholder has the right to own one or more shares of stock in a joint stock company. Companies of the stock market present shareholders with certificates of ownership that give shareholders the privilege to transfer their ownership interest by selling their stock to others at any time. Depending on the class stock, shareholders may also have a say in the election of the board of directors, and they have the right to share in distribution of the company’s income, the right to buy new shares of the company, and of course, the right to receive a sum of the company’s assets during the liquidation. The company’s boards of directors are entitled by fiduciary duties to act in the best interest of the shareholders, but the shareholders do not necessarily practice such duties towards one another.

Shareholders are not qualified to make use of the company’s building, materials, equipment, and other property, no matter the amount of percentages that they own in the company. They can though have an impact on the company’s policy, due to their rights in voting for the election of their directors (board of directors). A shareholder’s voting power in the company is as influential as the very percentage of shares owned. If for instance that a shareholder is not satisfied by the board of director’s course of actions, or rather the board of director’s performance is considered unflattering, a shareholder’s voice in suggesting a replacement of the management team can be heard. But such a practice rarely happens where shareowners attempt to change the faces of the board of directors. In almost all cases, board of directors and some other influential insiders are the ones who nominate new board candidates.

Shareholders sometimes find themselves stuck in a situation they call “locked in”, which means that shareholders are not able to either buy or sell their shares at all times. Despite of the higher value of the company, they are unable to apprehend that value. Even if new buyers are interested to buy the share, often shareholders go through a number of obstacles before they can proceed onwards with the sale. This problem occurs usually as a result of the company’s Shareholders Agreement. These kinds of Shareholder Agreements are thought to be common in regards of restricting transfer or disposal of shares. For instance, this agreement may limit the owning of shares to only a certain class of individuals (relatives, friends, etc.). Generally, before shareholders can sell their shares to a third party, they become subject to the form of “rights of pre-emption” whereby the shares that are on sale must first be offered to these special individuals. Consequently, a right of first refusal may prevent shareholders to sell their shares to an unknown party. A right of first refusal can considerably reduce the resale value, if the shareholding to be sold does not represent the majority of the shareholding.

Shareholders’ role in raising the organization’s finance is very vital as they are the very foundation of the establishment of the company. Good joint stock companies provide proofs of their healthy prospects through their positive income statement and balance sheet, thus convincing investors to place an investment in their company.

Tags: Investment Strategy //