What Happens When a Shareholder Invests Cash in a Corporation?
- By purchasing shares of stock in a corporation, a person becomes a part owner of the company. This provides the owner with many privileges, including voting on key company issues and receiving dividends. Although a person who doesn't hold shares can offer ideas, a shareholder holds the ultimate power. If a shareholder owns a large number of shares in a company or knows other shareholders who hold similar values to his own, they have great power over a corporation's future.
- There are two possible ways to purchase shares of a corporation. An investor can either purchase shares from a third party in the open market or in a private transaction, or he can purchase shares directly from the company. When an investor purchases shares in the open market or directly from a third party, the cash paid for the shares does not go to the company; the cash goes to the third party selling the shares. When a shareholder purchases shares directly from a company, this is called an offering and the cash goes directly to the company.
- By investing cash in a corporation, an individual earns shares and becomes eligible to receive dividends when they are announced by the company. For example, if a shareholder owns 100 shares and a company announces a 10 cent per share dividend, the shareholder receives a payment of $10 for holding the shares. This is a good way to earn a return on the stock while waiting for the stock to appreciate in price.
- Shareholders participate in annual meetings where they are allowed to vote on specific issues, including the election of the board of directors. The shareholder has the ability to vote for directors who hold similar values. Having a trusted associate on the board of directors helps ensure proper management tactics, such as making the best decisions about dividends, share repurchases, and the sale of different divisions.