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Understanding Your Rights as an Investor

written by: John Garger•edited by: Michele McDonough•updated: 1/19/2011

Many people make a living trading stocks and other securities. For those who hold securities for long-term investments, knowing the rights that accompany being a shareholder help make better investment decisions.

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    Shareholder Rights

    Corporation shareholders are the owners of the corporation. However, as owners of only a small part of the firm, investors do not control the corporation directly. Instead, as the principle-agent relationship suggests, managers are hired to make decisions for the owners and work toward maximizing shareholder wealth through strategic decision-making. As owners, stockholders are granted certain rights which, when exercised, can greatly influence the success or failure of the firm.

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    Dividend Rights

    Shareholders are awarded dividends based on the number of shares held. These payments are equal on a per-share basis except in the case where the corporation has issued different classes of common stock. Which types of stock a corporation has issued and the number of each type of stock outstanding can greatly influences the size of the dividend per share. The firm’s board of directors makes the decision to pay dividends, but generally a corporation that has paid dividends in the past will continue to do so or risk a negative signal to the market that things are not going as well as they once were.

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    Voting Rights

    Shareholders have the right to vote on some issues such as the election of members to the board of directors. Usually, one vote is granted for each share held but checking the corporation’s articles of incorporation will reveal whether the shareholder has the right to majority or cumulative voting. Majority voting indicates a situation where each candidate is voted for independently with one vote per share allowed. In cumulative voting, candidates are voted on jointly and a shareholder may put all of his/her votes on one candidate. With cumulative voting, shareholders with relatively small numbers of shares have a better chance of electing a candidate to the board of directors.

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    Liquidation Rights

    If the corporation is liquidated, shareholders have claim to any residual value in proportion to the number of shares held. If a corporation fails and assets are sold off to cover outstanding debts, it is possible that some value will remain in the form of cash, tangible and intangible assets, securities, or other assets. Although any remaining value may be small, this right does serve to lessen the impact of a failed corporation which has lost most of its stock value in the market.

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    Preemptive Rights

    Some corporations allow shareholders to have first rights to any new stock issues usually in proportion to the number of stocks currently held. This is called a rights offering and helps a shareholder mitigate dilution of the value of the stock currently held by having the right of first refusal to buy an equal proportion of newly issued stocks before they are offered on the open market.

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    Corporations grant certain rights to shareholders that are outlined in the articles of incorporation each corporation is required to file. These rights can reduce losses, eliminate dilution, and give shareholders some control over who runs the corporation and, consequently, how the corporation is run. By understanding these rights, shareholders can make better decisions about which stocks to buy and which corporate ideologies do not coincide with the shareholder’s beliefs about how the corporation should be run.