Effects of Business Decisions on Shareholders

Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

Entities, including private individuals, that own one or more shares of a company's stock are known as shareholders. Learn how business decisions affect shareholders, recognize the difference between preferred and common shareholders, and discover how dividends are distributed. Updated: 09/30/2021

What Is a Shareholder?

A shareholder is a person that owns at least one share of stock in the company. As a shareholder, a person stands to make money when the company is doing well or lose money during difficult times. This means being a shareholder comes with some risks. The good news is that, unlike owning the company, there is really no personal liability. If the company is sued, a shareholder will not lose any personal property or assets other than their investment.

There are a few things to know about being a shareholder. First, there are two types of shareholders. A common shareholder owns common shares of stock in a company and has a right to vote on company policies. With this form of ownership, the shareholder receives dividends, or additional shares of stock or money, depending on the company's financial condition.

A preferred shareholder is a higher form of stock ownership, and these shareholders receive dividends before common shareholders do. But they do not have a right to vote on business decisions.

Both types of shareholders have one common thing. They both have a vested interest in the company.

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How Do Business Decisions Affect Shareholders?

Let's explore how business decisions can affect a shareholder's interest in the company. Stock is valued by how many people are interested in purchasing it. When a company is doing well, the price of stock rises and there are few shares to go around. Conversely, when a company is doing poorly or some major issue arises, people tend not to purchase stock and sell the stock they may already own.

This is what makes this type of ownership risky. The shareholder has little to say in the business' operation but has a financial stake in its success. The possibility of something bad happening to an investment is always present.

Even something as personal as a divorce can send stocks into a whirlwind. When Rupert Murdoch divorced his wife of 41 years, the stock in his company, News Corps, actually rose. It is speculated that since Murdoch had a prenuptial agreement, shareholders were not concerned about his wife having a financial stake in running the company nor would he lose much from the divorce.

When Harold Hamm and his wife of 25 years filed for divorce, the stock in Continental Resources plummeted. Hamm and his wife did not have an agreement prior to marriage. It is thought that the shareholders may have been concerned about the future of the company's assets at the divorce settlement.

While these situations are of a personal nature, there are ways management can directly affect shareholders: financial decisions, operational decisions and ethical decisions.

Financial decisions are those that affect the bottom line in terms of revenue and profits. Decisions like taking on debt for expansion may turn away potential investors. This may be a warning sign that the company's revenues will not turn to profits. This will have a negative effect on the value of the stock.

Sometimes, operational decisions are made. The launch of a new product or merge with another company are examples of these and can go either way. If the launch is successful or if the merger creates a financially stronger company, the stock will have more value. Others will be interested in investing, and it will create higher demand.

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