When I first began investing in the stock market I thought it was synonymous with being an investor. However, investing can take many forms and is not just limited to stock market investing.
Investors and stockholders are not the same. Both terms can be used interchangeably although there is a difference between them. Stockholder refers to someone who holds shares in a company. An investor uses capital in any venture in return for profit.
While it can be easy to confuse the two, exploitinvesting.com envelopes the entire world of investing not just individual stocks. It is our job to analyze the complexities of investing and find hidden gems that others would overlook because they fail to understand all angles of an investment.
The Difference Between Investors and Stockholders
The key to understanding the differences between both terms is first understanding what each term is. Investors and stockholders, while similar, can have vastly different roles in companies and general finance.
The Life of an Investor
The term investor is widely used. Although it’s primarily related to financial circles, it can describe a wide range of things. However, in the realm of finance, it’s extremely important to understand what an investor is and their driving goals.
Investors are anyone who use capital to make a profit. Investors put capital into any form of venture designed to give them some form of return. This definition implies that it makes investing a blanket term for a wide range of ventures.
An investors main goal is to buy assets that can potentially create cash flow or be more valuable in the future. Some examples of common assets may include:
- A house
- Land
- Websites
- Equipment for a business
The list can go on since an investment doesn’t always have to be financial. For example, giving a building to a company from which they can start operating could be considered an investment. In this scenario, the building is an investment in that company. However, the important thing to note here’s that the investment must come with the promise of some form of return.
Using the example of the building above, if the person giving out the building gives it with no agreement or expectation of return (either financial or otherwise), then it’s not an investment. Rather, it’s a gift. Now, if the business agrees with the building owner to give a particular percentage of their profit to him, then that building can be seen as an investment, and the person who owns the building is an investor.
Asset to Equity Swap
This happened with a stock that I purchased in the past, Smart Sand. The company acquired a sand mine and equipment in exchange for shares in the company. While it diluted shares it was mutually beneficial for both the companies and shareholders since it aligned their goals.
It’s easy to see that investor is a blanket term. As such, it can describe a myriad of people in different industries. For the sake of understanding, though, there are three major types of financial investors, they are:
- Banks
- Angel Investors
- Venture Capitalists
Banks
Banks typically engage in investments through debt.
Debt investing generally involves loaning money out with the expectation that the borrower will return the initial investment with a predetermined amount of interest. Banks are the most common debt investment institution.
Angel Investors
Angel Investors typically fund startups. They give money to fledgling companies in exchange for a stake in the company.
Because the company has no profits or track record, these investors are typically more focused on the passion and process of the company rather than its results. Angel investors believe in the founders goals and profit alongside them.
Venture Capitalists
Venture capitalists invest both cash and expertise in a business. They generally invest in startup companies that require funding in exchange for ownership of a particular percentage of the company.
Venture capitalists usually have a very hands-on approach to the companies they invest in, taking part in management decisions and their direction. This differs from angel investing since the venture capitalists typically take a more active role in the company.
Value Investing
Value investing isn’t exactly a type of investing. Rather, it’s an overarching concept that surrounds investing in general. For the majority of investors, the general idea is to maximize profits.
Value investing involves buying stocks based on future prospects. Value investors buy stocks or shares that they believe are selling at less than their intrinsic value. Usually, these stocks are discounted for some underlying reason.
The ultimate aim of value investing is to make a profit through purchasing stocks you believe will do well in the future. While value investing is a type of investing, it’s better described as a principle that guides investments. As a result, many types of investors fall under its umbrella.
Stockholders
The terms stockholder, shareholder, and stakeholder are usually used interchangeably. While there are some slight differences between each, they usually mean the same thing. Stockholders can be considered a subset of equity investors.
A stockholder is a person that owns company equity. Equity represents a unit of company ownership, usually represented by shares or stocks. Most stockholders invest in companies either out of genuine interest in the company’s future or for profit.
Stocks represent units of ownership in the company. Companies distribute shares to willing buyers in order to raise funds. They then use these funds for company operations which increase the company’s value and by extension, the price of each unit stock.
This price increase is where stockholders gain their profit from. The relationship between stockholders and companies is mutually beneficial. Companies need capital, and prospective investors want to profit.
Along with profit, stockholders gain access to rights that investors may not always be entitled.
The most important of these are voting rights. As stocks represent a unit of ownership, it gives stockholders the right to vote. Stockholders can vote on many major company decisions, including but not limited to its governing board, company management, and the general direction of the company.
Conversely, holding shares also comes with some risk. This risk materializes mainly if the company does poorly. Stockholders can lose some or all of their investment should this happen.
Differences Between Investors and Stockholders
Now that both roles are understood, it’s far easier to understand their differences. Both investors and stockholders alike are usually in the financial markets to profit. However, the methods used and rights gained differ enough that there is a clear distinction between them.
Choice of Investment
The first and most important difference between both terms comes in the range of options each has. The term investor implies no boundaries to the range of financial instruments the person or entity uses to turn a profit. Investors can buy assets outside the stock market, while stockholders specifically exist in the stock market.
The term stockholder refers to investors who own equity in a company in the form of stocks or shares. As such, you can say that all stockholders are investors, but not all investors are stockholders.
Voting Rights
Another distinction that can be made between both parties is the rights allotted to stockholders. Stockholders usually have rights by virtue of the equity given to them from their shares. They can vote on the company policy and generally play a part in how it’s run.
Investors, on the other hand, don’t necessarily have this right. Depending on what the investor chooses to put his capital in, they could have some rights or none.
There are many types of investors in a company and each one has different rights. These investors include:
- Debt holders.
- Stockholders.
- Preferred Stock Holders.
Each one of these in the event of bankruptcy has varying claims on the company’s assets. Stockholders have last claim, while debt holders have the first claim.
This is why investing in low debt value stocks is beneficial for stockholders and carries the least amount of risk.
Motivation
While both investors and stockholders are in it for profit, it’s far more common for the term stockholder to represent a person or entity with a genuine interest in the future of the company.
This can be incredibly confusing to some, since you will often hear investor and speculator commonly used to describe somebody who buys stocks. In this case an investor has a long term interest in the stock doing well, while a speculator may jump in and out of a stock in the short term.
Both a speculator and an investor can be stockholders.
Conclusion
While it’s possible to interchange the terms stockholder and investor, a proper understanding of each will give you a better knowledge of the scope each term covers. The main difference between both comes from the range of options available, with investor being a more general term and stockholder being more specific.