Chapter: 5 Investing in Stocks

Section: 7 What are your Rights as a Shareholder?

Shareholders are the true owners of the company. In public companies, it is possible that there are hundreds to thousands of shareholders who own shares in the company. Moreover, since the shares are traded in the stock exchange, the ownership changes on a daily basis at least among the small shareholders. Therefore, it is impossible for thousands of shareholders to personally manage the business on a day-to-day basis. For this practical reason, the management is separated from the shareholders and handed over to professional managers. To look after the interest of shareholders, a board of directors is appointed by the shareholders. This concept is known as Agency Relationship and the role of the board of directors and management is to maximize the shareholders wealth.

  • Attending Shareholder Meetings
    The Annual General Meeting is a gathering of all stakeholders of the company to discuss financial results and to pass resolutions relating to appointment of directors and auditors etc. The meeting is attended by the management staff, directors and shareholders. All shareholders have the right to attend the meeting or to propose a proxy on their behalf.

  • The Voting Right
    In the shareholder meetings, all major decisions are based on majority rule, i.e. by way of a voting. Shareholders are entitled for voting rights based on the number of shares they hold. This way a major shareholder can appoint a director to see over his/her interest in the company.

  • Dividend/Bonus Shares
    Shareholders are entitled to the cash dividend and/or bonus shares. A certain percentage of the profit earned by the company during the year might be paid to shareholders as dividend. Depending on the number of shares owned by shareholders on a specific date, dividends will be distributed. Sometimes, the company may opt to issue bonus shares along with or instead of a cash dividend. From an analytical point of view, bonus shares do not add anything to the wealth of the investor because with the increase in the number of shares outstanding, the earning per share decreases and so does the stock price.

  • Residual Rights
    Residual right applies in a situation where a company is dissolved; the shareholders have the right to receive the proceeds that results from dismantling the corporation after settling the other priority stakeholders. It should be noted that the ordinary shareholders are the last party to receive anything left over after settling to all the interested groups who have had dealings with the corporation.