The easiest way to answer the question is that a shareholder is a part owner of a business.
But let’s make it more insightful and answer it from the perspective of an Income Statement.
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The top line of an income statement is REVENUE. This is the amount of money the business took from its customers.
You often hear ‘the customer is always right’ because the customers contribute REVENUE and help the business pay everyone else.
The COST OF GOODS SOLD reflects the next most important group of people, the suppliers.
In a chicken rice business, for example, the suppliers are crucial because there would be no business without rice and chicken. Hence suppliers must be paid promptly.
OPERATING EXPENSES are expenses the business incurs to pay the landlord, staff, and other necessary expenses.
If the business fails to pay these expenses, the landlord could evict the business, and the staff could report the company to the government.
The business will also need equipment like rice cookers, cookwares and crockeries to operate. These are captured as DEPRECIATION in the Income Statement.
They are often not expensed immediately because they are used for a few years before replacements are needed.
If the business has borrowings from banks or bondholders, it has to make timely repayments to prevent a default. Part of these payments are reflected as INTEREST EXPENSES.
And don’t forget to pay the government in the form of TAX EXPENSES. No one lives off the country for free.
Lastly, we arrive at EARNINGS, which is what is left after all of the above expenses are paid. A business is profitable if its REVENUE can cover all of its EXPENSES.
Dividends can then be paid out from the EARNINGS to reward the shareholders.
Otherwise, EARNINGS that are retained will increase the value of the business and shareholders may realize the capital gain when they sell it for a higher price.
Being a shareholder means taking the highest risk because they get the last dip in EARNINGS after everyone else has been paid. As a result, shareholders should be rewarded with the highest return.
