The role and rights of shareholders

Shareholders own parts of companies by holding shares, which represent their investment in the business. They provide essential capital that helps companies operate and grow.

Who can be a shareholder

A shareholder is any individual, company, or institution that owns at least one share in a business. In private limited companies (Ltd), shares are typically purchased by family members or friends of the founders. In public limited companies (PLCs), shares can be bought by a wider range of buyers, including individuals, other businesses, or organisations like pension funds.

Key roles and involvement of shareholders

Shareholders mainly provide funds to support the company's activities. In small Ltd companies, shareholders often also serve as directors, with those holding the most shares having the greatest influence over decisions. In PLCs, most shareholders do not participate in day-to-day management but retain specific rights.

Rights held by shareholders

• Voting on decisions - Shareholders can vote on important matters and company performance, often at an annual general meeting (AGM), which is legally required for PLCs.
• Majority shareholder power - A shareholder owning more than 50% of the shares (majority shareholder) has the most control in decision-making.
• Receiving dividends - Shareholders may receive a dividend, which is a share of the company's profits distributed per share owned.
• Limited liability protection - Shareholders' financial risk is limited; if the company fails to pay debts, they only lose the amount they originally invested.

Reasons for investing in shares

People invest in shares for various financial, personal, or strategic motives, often balancing potential rewards against risks.

Motives behind share investments

• Capital gain - Investors buy shares at a low price and sell them when the price increases to make a profit.
• Dividend income - Shareholders receive dividends as a return on their investment, with larger shareholdings leading to bigger payments since dividends are allocated per share.
• Business involvement - Particularly in small Ltd companies, investors may want to participate in managing the business.
• Alignment with company values - Some invest because they support the business's social, ethical, or environmental goals.
• Supporting company growth - Investments can help a business, such as a family-run one, to survive or expand.
• Venture capital opportunities - Venture capitalists invest in promising startups, accepting high risks for the chance of substantial returns if the business succeeds.

How share prices are determined

Share prices vary based on the type of company and market conditions, reflecting the balance between buyers and sellers.

Share pricing in different company types

Market forces affecting share prices

Share prices in PLCs are set by demand and supply on the stock market. When demand exceeds supply (more buyers than sellers), the share price rises. When supply exceeds demand (more sellers than buyers), the share price falls.

Factors affecting demand and supply of shares

Various economic and company-specific elements influence whether investors buy or sell shares, impacting overall share prices.

Influences on demand for shares

• Company performance - Strong results can lead to higher dividends, boosting demand.
• Speculation and news - Rumours of new products or efficiency improvements can attract investors.
• Current share price - Low prices may seem like bargains, increasing demand; high prices might prompt sales for capital gains.
• Interest rates - Low rates make shares more appealing than savings accounts, as potential returns are higher.
• Economic conditions - A growing economy increases investor confidence and available funds, raising demand; a weak economy reduces it.

Influences on supply of shares

Companies may issue additional shares to raise capital, increasing supply and potentially lowering prices.

The effects of changes in share prices

Fluctuations in share prices can have immediate and longer-term impacts on investors, companies, and market confidence.

Short-term and long-term impacts of share price changes

• Capital gains or losses - Traders may experience quick profits or losses from buying and selling in response to price shifts.
• Effects on long-term investors - Those holding shares for extended periods are less impacted by short-term volatility.
• Link to company profits - Price changes often mirror profit levels, which can affect dividend payouts.
• Company valuation - A falling share price reduces the total market value of the business.
• Investor confidence - Persistent price declines can erode trust, making it harder for the company to attract new investments over time.