Thinking of investing in a company? Well, there are a few different pathways you can take. You may become an investor or a shareholder. It is common for these terms to be used interchangeably. However, there are some key differences between the role of investor vs shareholder. This article will define the role of an investor vs shareholder, to help you make a well-informed decision about which investment path you desire to take.
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Who is a Shareholder?
A shareholder is anyone who buys shares in a company that issues shares. Importantly, a shareholder holds shares in the company. Shareholders that buy issued shares in a company in fact own part of that company. However, the percentage of ownership a shareholder has is equivalent to the number of shares they choose to buy and hold. Thus, shareholders are part owners of the corporation they buy shares from. In doing so, all shareholders will have a financial interest in the profitability of that company.
A shareholder may be an individual, employee, company or institution. As a general rule of thumb, all companies must have at least one shareholder. If your company is a private company, you can have a maximum of 50 non-employee shareholders. However, if your company is a public company, the number of possible shareholders is unlimited.
Shareholders also enjoy a range of duties and rights. These duties and rights are explored below.
Why Become a Shareholder?
As referred to above, shareholders are the equity owners of the company they buy and holds shares from. Because shareholders are equity owners, they can participate and benefit from the companies future growth. As the company grows, so does the share price. Shareholders can choose to sell their shares to make or profit or wait until the company decides to pay dividends.
Furthermore, shareholders may partake in the financial workings and certain management actions of the company. However, these duties and rights will depend on the class of securities, the company constitution and the shareholders agreement. In general, shareholders have the right to:
- Access financial records,
- Sue company directors for their wrongful actions,
- Vote and engage in corporate decision making,
- Attend the Annual General Meeting (AGM),
- Trade or transfer their share ownership.
For more information on shareholders rights and duties, see our article ‘Shareholders Rights and Responsibilities‘.
Who is an Investor?
Generally speaking, an investor is anyone who invests money into a company, or any other business structure, with the purpose of taking an ownership interest in that company or other business structure. So, an investor places their money into the business to help with business plans, growth and development. The purpose of doing so is to get a great financial return after the term of their investment is up.
Now, this all sounds pretty similar to a shareholder, however, there are some fundamental differences between an investor vs shareholder. An investor can invest money into a company without the need for shares to be issued. Also, investors may choose to invest in any sort of business structure, including a sole proprietorship, a partnership, etc. It is quite common for investors to place money in startup businesses to aid their growth and development. This is an action shareholders cannot do, as shareholders can only become equity owners when the company decides to issue its shares.
Why Become an Investor?
When deciding to become an investor, the major thing to look for is the potential profitability of the business. Many investors choose to invest in businesses at the early stages, to provide them with the funds to build their brand. However, investors can also choose to fund already established businesses to help them grow and further develop. The objective of becoming an investor is to receive a stake in the business or return from the business.
Key Takeaways
The differences between an investor vs shareholder are quite subtle. However, there are some key differences. A shareholder is an individual or entity that buys and holds shares in a business as an equity owner of that company. Furthermore, shareholders have certain rights and duties they can exercise as the equity owners of that company. However, investors may choose to put money into any sort of business, whether it be a partnership, sole proprietorship or company. Shares do not have to be issued, as the main purpose of investment is to help with business development and growth for the promise of a future return and gain.
