Considering investing in a company? If you choose to invest your money into a company, you can either be an investor or a shareholder, depending on whether or not the company issues shares. Although the terms shareholders and investors are often used interchangeably, there are a few differences to note. In this article, we will explain the key difference between an investor and a shareholder.
What are shareholders?
A shareholder is anyone who buys shares in a company that distributes shares. When you buy a share, you actually own part of that company. The percentage of your ownership is contingent upon how many shares you own. Due to this level of financial commitment to the business, shareholders are highly interested in the profitability of the company that they chose to buy into.
A shareholder can be a single individual, an employee, a company or an institution.
Why become a shareholder?
As we’ve just covered, shareholders are equity owners in the company that they hold their shares in. Subsequently, shareholders can benefit from the company’s future growth by selling their shares. As the company grows, so does their share price. Shareholders can choose to sell their shares to make profit or wait until the company decides to pay dividends.
Depending on the class of securities, the company constitution and the shareholders agreement, shareholders may partake in the financial workings and certain management actions of the company. Generally, shareholders have the right to:
- access financial records;
- sue company directors for any wrongful actions;
- vote and engage in corporate decision making; and
- trade or transfer their share ownership.
What is an investor?
Similarly to a shareholder, an investor is anyone who invests money into a company with the purpose of taking ownership interest in that company. An investor places their money into the business to assist the business in growing and developing, in order to generate a large financial return after the term of their investment is up.
However, an investor can invest money into a company that does not distribute shares. For example, many investors choose to invest money into a start-up company, in the hopes that the company will excel in later years.
Why become an investor?
There can be a number of benefits for both shareholders and investors. The major thing to consider when deciding to become an investor is to look for the potential profitability of the company. Many investors put money into companies in the early stages of the business, in order to provide the business with the funds to build, grow and develop their brand. The main purpose of investing in a company is to receive a stake or return from the business.
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So, are shareholders and investors the same? No. Although the differences are quite subtle; a shareholder is an entity owner of a company when it is possible to buy and hold shares, whereas an investor is someone that puts money into a business that does not have shares issued. If you can’t decide whether to become an investor or a shareholder in a company, we recommend seeking legal advice. Our sister company, Legal Kitz, can assist you in ensuring your concerns are addressed, whilst providing quality advice that is tailored to your situation. You can request a free 30-minute consultation with their experienced and highly qualified team via our website now.