An equity holder owns one or more shares in a company, entitling that person to shares of the proceeds as well as losses of the firm. Terms like shareholder or stockholder may be used as well. Equity holders have an interest in the company’s fortunes and are entitled to annual reports and disclosures from administrators. People in charge of a company are tasked with protecting the interests of the people who hold shares, and cannot embark on activities that might threaten profits or destabilize the company.
Companies can issue equity in the form of stock certificates which members of the public as well as other investors can buy. Each certificate has an intrinsic value, as well as the possibility for dividends when the company makes money. Values of shares can rise when companies do well and other investors are interested in buying equity. They can fall when the company’s performance drops and its stock is a less appealing purchase. Thus, the equity holder shares directly in the fortunes of the company in the long term.
It is common for companies to retain at least some of their equity to prevent hostile takeovers. In some cases, the company only has one equity holder, as seen with some family companies. Sales of equity can also be limited for the same reason. People who hold private shares, for instance, cannot sell them on the open market, and typically share equity with other members of a family or cooperative. Stock splits may also be used to increase the number of shares available, while also reducing the value of each share.
Firms issue annual equity holder reports. These provide information about financial activities and earnings, along with discussions of specific issues that may be of concern to equity holders. Each firm is also responsible for maintaining accurate records on equity holder ownership. When people sell or transfer shares, they report the transaction to the company so it can update its records. Keeping this information accurate is especially critical for dividend payments, which will be directed to the registered owner of record.
This differs from a debtholder, who has a financial stake in a company in the form of a debt obligation like a bond. If the company goes bankrupt or experiences financial problems, it has certain obligations to people who hold debt. They are typically ranked by type of debt to determine who is first in line for repayment. Debts can be a form of investment, but they also come with risks if the debts are not repaid.