Shareholder Base

A corporation's complete list of shareholders is referred to as its shareholder base.

A corporation's complete list of shareholders is referred to as its shareholder base. In other words, it is a group of company owners (investors) who own a specific number of stocks (shares) that are distributed proportionally based on the amount of investment made.

Shareholders are various, which means that a shareholder base may include investment firms, such as pension funds or hedge funds, who have their financial targets and thus investment strategies

Individual or wealthy investors with varying investment horizons are also welcome to participate.

The majority of businesses are concerned with shareholder base management. The main reason is that companies believe that attracting an "ideal" shareholder base will result in significantly higher stock prices.

Shareholders are entitled to the proceeds after a company's assets are liquidated. As a result, creditors, bondholders, and preferred stockholders take precedence over common stockholders, who may be left with nothing after all debts are paid.

Identifying Shareholders' Base

As defined above, a shareholder owns one or more shares of a company's stock or mutual fund. Being a shareholder (or stockholder, as they are known) entails certain rights and responsibilities. 

A shareholder can vote on specific issues that affect the company or fund in which they own shares and share in the overall financial success.

A majority shareholder is a single shareholder who owns and runs more than 50% of a company's outstanding shares. Minority shareholders, on the other hand, are those who own less than 50% of a company's stock.

The majority of shareholders are company founders. In addition, they are frequently related to company founders in older, more established companies. 

When these shareholders control more than half of the voting interest, they significantly influence critical operational decisions. 

That includes replacing board members and C-level executives such as chief executive officers (CEOs) and other senior personnel. 

As a result, many businesses avoid having majority shareholders among their ranks.

Unlike sole proprietors or partners, corporate shareholders are not personally liable for the company's debts and other financial obligations. As a result, if a company goes bankrupt, its creditors cannot seize a shareholder's assets.

Controlling Shareholder vs. Majority Shareholder

In some cases, a company executive may be a controlling shareholder because they own the most voting shares, but they may not be the overall majority shareholder.

A controlling shareholder does not have to own the majority of the stock in the company. However, they hold enough stock to have a say in company matters and are the company's largest shareholders.

For example, Mark Zuckerberg, the founder, and CEO of Meta (formerly Facebook), is the controlling shareholder, but he does not own more than 50% of the total shares outstanding. Meta's stock is divided into two classes: 

Class A and Class B shares. Class B shares, which Zuckerberg primarily owns, have ten votes per share, whereas Class A shares have one vote per share.

Because Zuckerberg owns the most common stock in the company, he is the controlling shareholder but not the majority shareholder. 

The dual-class common stock structure gives Zuckerberg control over issues that require shareholder approval, despite owning far fewer than a majority of the common stock shares.

The majority or controlling shareholders are not always involved in the company's day-to-day operations. As a result, these people are sometimes referred to as "passive" shareholders. 

They may have been involved in the day-to-day operations of a company at one point but left to pursue other interests or due to age.

Specific Considerations

When it comes to being a shareholder, there are a few things to consider, including the rights and duties of being a shareholder and the tax implications.

1. Rights of Shareholders:

Shareholders traditionally have the following rights under a corporation's charter and bylaws:

  • The authority to examine the company's books and records
  • The ability to sue the corporation for the actions of its directors and/or officers.
  • The ability to vote on important corporate matters. Example: naming board directors and deciding whether or not to approve potential mergers.
  • The right to receive dividends
  • The right to participate in annual meetings in person or via conference calls

If they cannot attend voting meetings in person, they have the right to vote on critical issues by proxy, either via mail-in ballots or online voting platforms.

  • The right to a proportionate share of the proceeds if a company liquidates its assets.

2. The Internal Revenue Service (IRS) and shareholders:

It is essential to know that any profits (or losses) should be reported on your tax return if you are a shareholder. Take into account that this rule only applies to S corporation shareholders. 

These are typically small to medium-sized companies with fewer than 100 shareholders. The corporation's structure allows for the income generated by the business to be distributed to shareholders.

Other benefits, such as credits/deductions and losses, are also included.

The Internal Revenue Service (IRS) states that S corporation shareholders report the flow-through of income and losses on their tax returns and are taxed at their individual income tax rates. 

It allows S corporations to avoid paying double taxes on corporate income. Instead, S corporations are taxed at the entity level on certain built-in gains and passive income.

It is in contrast to C corporation shareholders, who face double taxation. This business structure's profits are taxed at the corporate and personal levels for shareholders.

Shareholder Types

There are various types of shareholders depending on ownership and control.

If a company raises funds by issuing equity or preference shares, the holders of these shares are referred to as Equity Shareholders and Preference Shareholders, respectively.

Debenture holders have received funds from the company through a loan, i.e., the issuance of debentures.

Each type of shareholder has different rights in how the company operates.

1. Equity Shareholders: 

These are the people who own the company. They have voting rights in the company based on the number of shares they own. They have the right to question the work of the company's management.

For example, their votes determine whether or not to appoint a director, or auditor, raise debt, make acquisitions, and so on. On the other hand, if a majority of shareholders vote against the motion, the company's promoters must follow the shareholder's decision.

When a company is wound up, equity shareholders are paid for the value of their holdings after debt holders, and preference shareholders are paid off.

Dividends will also be paid to Preference shareholders first, followed by Equity shareholders.

Equity shareholders are eligible for bonuses and rights and participation in buybacks.

Furthermore, equity shareholders can be divided into promoters, institutional investors (both foreign and domestic), and the general public based on their shareholding pattern.

2. Preference Shareholder: 

Because preference shareholders do not have voting rights in the company, they cannot interfere with its management.

They are entitled to receive dividend income from any profit before it is distributed to equity shareholders. When the company is wound up, debenture holders are paid first, followed by preference shareholders.

3. Debenture holders: 

Debenture holders are the company's creditors rather than its owners. They do not have the right to vote. They receive interest payments from the company rather than dividends.

This interest payment is made at a predetermined rate agreed upon by the company and the debenture holders. Debenture holders are paid first when the company is wound up because they are the company's creditors.

Shareholder-based strategies

Growth and value are two fundamental investment approaches, or styles, in stocks and stock mutual funds

1st footnote Growth investors look for companies with solid earnings growth, whereas value investors look for stocks that appear to be undervalued in the market.

Because the two styles complement each other, combining them can help add diversity to your portfolio.

1. Growth strategy:

Growth stocks are companies that have shown above-average earnings growth in recent years and are expected to continue delivering high-profit growth, though there are no guarantees. 

Emerging growth companies have the potential for high earnings growth but have not established a track record of solid earnings growth.

The growth funding key characteristics :

  • They are priced higher than the general market. Shareholders will pay high price-to-earnings multiples with the expectation of selling the companies at even higher prices as they grow.
  • High earnings growth figures While some companies may be depressed during periods of slower economic improvement; growth companies may be able to maintain high earnings growth regardless of economic conditions.
  • More volatile than the market as a whole. The risk in purchasing a specific growth stock is that its high price could plummet in the event of negative news about the company, mainly if earnings disappointed Wall Street.

Examples of companies that used Growth strategy:

a- Semrush: This is an example of a company that began with a basic SEO and paid search platform.

Over time, the company added new features and is now a comprehensive software suite. Although the target audience remained constant, new functionality attracted a more significant audience segment.

Semrush, which has a current market capitalization of more than $2.7 billion, found this business growth strategy effective.

b- Salesforce: They pioneered the concept of cloud-based subscription software in an industry dominated by powerful, expensive, complex enterprise software that required an army of professional service reps to get it to work.

Salesforce increased and is now worth more than $21 billion. In addition, the software industry evolved and is now completely saturated with other SaaS offerings.

2. Value strategy:

Value investors seek companies that have fallen out of favor but still have strong fundamentals. In addition, stocks of new companies that have yet to be recognized by investors may also be included in the value group.

The following are the key characteristics of value funds:

  • Lower in price than the rest of the market. The concept behind value investing is that good companies' stocks will appreciate over time as other shareholders recognize their true worth.
  • They are priced lower than comparable companies in the industry. Many value investors believe that most value stocks are created due to investors overreacting to recent company issues. 

Such disappointing earnings, negative publicity, or legal issues may raise concerns about the company's long-term prospects.

  • Carry slightly less risk than the overall market. However, because value funds take time to recover, value stocks may be better suited to long-term investors and carry more price volatility than growth stocks.

For example, based on the number of shares outstanding divided by the company's capitalization, the book value of a company's stock maybe $25 per share. 

As a result, if it is currently trading at $20 per share, many analysts would consider it a good value play.

Value or Growth or both?

Which strategy, growth or value, will produce higher long-term returns? For years, the debate between growth and value investing has raged, with each side offering statistics to back up its case. 

According to some studies, value investing outperforms growth over long periods on a value-adjusted basis. In addition, according to value investors, short-term thinking often drives stock prices to low levels, creating excellent buying opportunities.

Growth stocks, in general, have the potential to outperform when interest rates are falling, and company earnings are rising, according to history. But, conversely, they may be the first to suffer when the economy cools.

Value stocks, particularly those in cyclical industries, may perform well early in an economic recovery but are more likely to lag in a long-term bull market.

Long-term investors may combine growth and value stocks or funds for the potential of high returns with lower risk. 

This strategy, in theory, allows investors to profit throughout economic cycles in which general market conditions favor either the growth or value investment styles, smoothing any returns over time.

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Researched and authored by Ranad Rashwan | LinkedIn

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