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Equity stocks are one of the most preferred avenues for investments despite the risk they carry. It is because of the multiple benefits that stocks offer, including earning dividends, getting voting rights and allowing the growth of wealth through capital appreciation when share prices increase in the market.
While various investment avenues can generate regular income and wealth growth, voting rights and participation in company management are benefits unique to stocks. In today’s article, let’s discuss the concept of control stocks that comes into the picture when a shareholder has significant voting power.
Voting rights with stocks
When investors invest in equity stocks, they get a portion of the company’s ownership. Such investors share the company’s profits through dividends and participate in the management through voting rights.
With their voting power, shareholders can express their opinions about management decisions by either agreeing or disagreeing with them. The company’s management then makes decisions based on the majority.
What is a control stock?
A control stock is an equity stock or a collection of stocks that has the power to control the company’s management. Where some shareholders hold a majority portion of outstanding shares or at least a significant portion that can influence the management’s decision, such portion is called controlling shares or controlling stocks.
How does a control stock work?
Achieving the status of a controlling shareholder requires investors to invest more and purchase a significant number of shares. Some companies often hold 51% with themselves and give away the remaining 49% for public subscription. They do this to retain the majority of shares with themselves to ensure having an upper hand in decision-making
Sometimes, companies issue different classes of shares. Some classes have more voting rights than others but are more expensive. Let’s say a company has two classes of shares – Class A and Class B. Class B may represent shares where each unit carries one vote, while Class A may represent shares where one unit carries ten votes. Naturally, shareholders with Class A shares will have more voting power and may come under controlling shares based on how many units they acquire.
Control stock vs inventory stock
It is important here for investors to understand that control stock and stock control (Inventory stock) are two different concepts. While control stock talks about holding the majority of stocks of a public company, stock control is a concept that revolves around maintaining sufficient inventory in the business.
What is the benefit of holding a control stock?
Holding controlling shares of a company comes with various benefits. But, it also comes with increased cost and risk. Some of its benefits of control stocks are:
- Holding a significant portion leads to a higher degree of ownership in the company.
- With higher control over the company’s management, shareholders can positively contribute towards favourable decisions, helping the company’s growth, which in turn increases their wealth, too.
- Besides these, controlling shareholders earn higher dividends since the number of shares they hold is more.
However, as mentioned earlier, this also comes with a high degree of risk. Equity stocks are exposed to extreme price fluctuations, which can lead to investors losing all their wealth at once. Hence, careful consideration of the stock’s historical performance and the company’s fundamentals is essential before buying a controlling share in a company.
Example of a control stock
Let’s take a fictional example of Company ABC Ltd. It has two classes of shares, A and B, with equal rights for dividends and assets. But, Class A shares are entitled to higher rights concerning voting power. The firm issues 1,000 shares each under Class A and Class B, with each unit carrying ten votes and two votes, respectively.
So, investors investing in Class A shares will be entitled to higher voting power, thereby making them control stocks.
Bottomline
Control stock refers to the portion of shareholding that gives investors a controlling power in the firm’s management. It generally relates to those shareholders who have more voting rights than others because of the significant number of shares they hold.
While investing in stocks in a large number can give investors the benefit of control and ownership, it also increases the risk. Hence, analysing the stock thoroughly and diversifying the portfolio to cover this risk is vital.
FAQs
Restricted stock units are usually given to employees of public companies, that come with a vesting schedule. The benefits of such stocks are conditional, and employees can reap those benefits upon satisfying the condition.
Controlling stock, on the other hand, is where shareholders have majority shareholding in the company, which gives them an upper hand in making decisions for the firm.
The company’s management, which has top-level employees like the president, vice president, directors, etc., has a larger say in the firm’s decisions. Shareholders only participate in annual meetings and may not be able to influence the firm’s decisions if they do not have majority shareholding.
To become an individual controlling shareholder, an investor must purchase 51% of the company’s shares. But, this may not be easily possible through stock market trading as shares will be open to the general public. Also, if the company does not give up 51% for public subscription, an investor cannot subscribe to that through IPO/secondary market trading.
Non-controlling shareholders are those who own less than 51% of the overall shares. Usually, shareholders who invest through the stock market fall under this category.
No, a minority shareholder cannot be a controlling shareholder. One minority shareholder’s opinion cannot influence the management’s decision. However, multiple minority shareholders can get together and vote towards a common opinion to influence the firm’s decisions.