When you buy a share, you buy a small part of a company. That makes you one of its owners, with rights set by the company's constitution and by the law of the country where it is listed. Many new investors do not know what those rights are, and some assume they control the company in a way they do not. This guide explains the main rights of an ordinary shareholder, what they mean in practice, and where they stop.
The details vary by country and by share class, so treat this as a general picture. The company's articles of association and the law of its market set the exact rules.
Limited liability
The most basic right is limited liability. A shareholder can lose the money paid for the shares, but is not normally responsible for the company's debts. If a company fails with debts larger than its assets, the creditors can claim against the company, but not against an ordinary shareholder's other assets.
This protection is one of the reasons owning shares is considered a limited risk, compared with owning a business outright. The maximum loss is the price paid, though that can still be a large amount.
A share of profit, through dividends
Shareholders are entitled to a share of profit when the company decides to distribute it. The board proposes a dividend, and the shareholders usually approve it at the annual general meeting. The right is to receive the dividend once it is declared, not to demand that one is paid. A company can choose to keep its profit in the business.
The guide on dividends explains how payments are made and how to judge them.
The right to vote
Ordinary shares usually carry a vote at the annual general meeting, and at other meetings where the rules require one. Shareholders vote on matters such as the election of directors, the appointment of auditors, the approval of the annual accounts and the dividend, and some major transactions.
The strength of the vote depends on how many shares you hold. A small holder has one vote per share, but the votes of large holders such as founders, governments or institutions can decide most outcomes. A single share gives you a voice, not control.
Many shareholders vote by proxy, which means appointing someone else to vote for them. Check the notice of the meeting, because the deadline for a proxy vote is usually set in advance.
The right to information
Shareholders are entitled to receive the annual report, the half-yearly or quarterly results that the company must publish, and notices of meetings. Listed companies must also announce significant events to the market, such as major contracts, changes in management and large transactions.
The right to information is most useful when you use it. Read the notices, check the accounts and compare the company's statements with the facts over time. Some markets give shareholders the right to ask questions at the meeting, and the answers are often recorded.
Some information is not available to shareholders in the same way. Insiders such as directors can have access to information that is not yet public, and trading on that information is illegal in most markets. Always check the rules before you trade around an announcement.
The right to transfer
You can usually sell your shares at any time on the market, subject to the rules on lock-ups. The right to transfer is one of the most valuable rights, because it lets you leave the company when you choose. Some companies have restrictions on transfer, particularly private companies, and listed companies may have lock-up agreements for certain holders.
Pre-emption rights
In some markets, existing shareholders have a right to be offered new shares before the company issues them to outsiders. This is called a pre-emption right, and it protects you from dilution. If you do not take up the offer, the right may be sold, or you may lose the value of it.
Check whether the rule applies in your market and whether the company can waive it. A rights issue is a common case, where existing holders are offered new shares at a set price.
The residual claim on assets
If a company is wound up, its creditors are paid first. Shareholders receive what is left, if anything. This is called the residual claim. In practice, shareholders often receive nothing when a company fails, because its debts exceed its assets.
The residual claim is why shares are riskier than bonds of the same company. Bondholders are paid before shareholders, so in a failure they usually recover more.
What shareholders cannot do
A shareholder does not run the company day to day. Directors manage the business, and they are answerable to the shareholders as a body. An ordinary shareholder cannot instruct a manager to change a decision, and cannot take money out of the company except through dividends or the sale of shares.
Holding a small number of shares gives you little influence over the company. Shareholder activism is possible, through questions, voting and sometimes by joining with other shareholders, but it is an effort, and it works best for large holders.
A worked example
Suppose a company has 1 million shares outstanding, and you own 1,000 of them, which is 0.1 percent of the company. The company declares a dividend of 2 per share, so you receive 2,000 before tax. At the annual meeting, the shareholders vote on the board. Your 1,000 votes are 0.1 percent of the total, which is unlikely to change the outcome on its own.
If the company fails and its assets are sold for less than its debts, the creditors are paid first. You may receive nothing, but you cannot lose more than the 1,000 shares were worth when you bought them.
Your rights depend on the share class
Not all shares are the same. A company can issue ordinary shares with one vote each, preference shares that pay a fixed dividend ahead of ordinary shares, or shares with weaker or stronger voting rights. Some markets issue non-voting shares, which carry the economic claim but no vote. The share class is stated in the company's articles and its listing details.
Check the class before you buy. A holder of non-voting shares can receive the same dividend as an ordinary holder while having no say at the meeting. A holder of preference shares may have a fixed claim that ranks ahead of ordinary holders in a failure. Your rights come from the class you own, not from the name of the company.
Practical steps for an ordinary shareholder
- Read the annual report and the results, not only the headlines.
- Check the notice of each meeting, and vote or appoint a proxy before the deadline.
- Know the share class you hold, because the rights can differ between classes.
- Read the company's announcements about dividends, rights issues and transfers.
- Keep the holding in proportion to your savings, because the residual claim means you can lose the whole investment.
Key takeaways
A share gives you limited liability, a claim on dividends when they are declared, a vote on major decisions, the right to information, the right to sell, and a residual claim on assets if the company is wound up. It does not give you control of the company or the right to take its cash. Read the notices, vote where you can, and check the share class and the rules of the market you hold in.
This guide is for general information, not financial advice. See the disclaimer.