Question

1)Explain why being a residual claimant makes stock ownership risky.

2) Do individual shareholders have an effective say in corporate governance matters?

Answer 1

1. Residual claim will make the stock ownership risky because residual claim will mean that common equity share holders will be having the last claim on the Asset in case of liquidation of a company and they will not be getting anything from the company in the case the company is not left with anything after discharging all the other creditors that so it is a risky element in association with ownership of stocks because when we will be owning stocks, then as a common equity shareholders will always be having residual claim on the Assets of the company in case of liquidation so we will not have any right on getting our capital back from the company in case of insolvency of the company, so it will only be other shareholders like preference shareholders and debt holders along with secured creditor and other stakeholders who will be discharged first and anything left will be only used for discharging of the claim of equity share holder.

2. Individual shareholders do have the voting rights and they are able to vote their opinion in various Annual meeting but in general, common shareholder does not have enough right in order to exercise the control over the company because only those shareholder who have a higher amount of ownership stake in the company are able to control the management of the company to large extent but individual shareholder cannot change the overall management and direction of the company because he will be having a very lower amount of ownership stake so he will have the right to vote but he cannot have the influence on the decision making of the company.