What Are Ordinary Shares?
Ordinary shares also called common shares, are stocks sold on a public exchange. Each share of stock generally gives its owner the right to a single vote at a company shareholders' meeting. Unlike in the case of preferred shares, the owner of ordinary shares is not guaranteed a dividend.
The vast majority of shares sold on all of the U.S. stock exchanges are ordinary shares.
Understanding Ordinary Shares
An ordinary share represents a fraction of ownership in the corporation that issues it. As an owner, the shareholder gets a vote in the company's major decisions, decided at its shareholder meetings.
The shareholder may or may not receive a dividend. The company's board of directors decides whether a dividend will be awarded, and how much it will be. The dividend represents the stock owner's share of the profits of the corporation over the past quarter or year.
A corporation may also issue preferred shares. These are a kind of hybrid of a stock and a bond. Their owners are guaranteed a set dividend payment. The price of the shares may rise or fall but is not as volatile as the common stock price. Investors in preferred shares are motivated primarily by the steady income from dividends.
Key Takeaways
- Ordinary shares of stock represent proportional ownership of a company.
- These shares come with voting rights equaling one vote per share.
- Owners of ordinary shares may or may not receive dividends based on a company’s performance.
- Preferred shares come with guaranteed dividends at a set percentage.
The Rights of Ordinary Shareholders
Ordinary shareholders have the right to a corporation's residual profits. In other words, they are entitled to receive dividends if any are available after the company pays dividends on preferred shares.
This is effectively meaningless. The company's directors may well decide to plow all of its spare cash back into the business, in which case no residual profits will be available for dividends.
Ordinary shareholders also are entitled to a share of the residual economic value of the company if the business collapses. However, they are last in line in bankruptcy court after bondholders and preferred shareholders. As such, ordinary shareholders are on the same footing as unsecured creditors.
The Advantages of Ordinary Shareholders
Ordinary shareholders take on greater financial risk than preferred shareholders of a corporation, but they also may reap greater rewards. If a company makes a large profit, the creditors and preferred shareholders do not receive more than the fixed amounts to which they are entitled, while ordinary shareholders may divide the windfall among themselves.
The same occurs when companies such as start-ups are sold to larger corporations. Ordinary shareholders usually profit the most.
In addition to the right to residual profits, shareholders are entitled to vote for the company's board members and to receive and approve the company's annual financial statements. (Some preferred shareholders also receive voting rights.)
The Value of Ordinary Shares
In many jurisdictions, ordinary shares have a stated "par value" or face value, but this is a technicality and is often set at a few pennies per share. Market forces, the value of the underlying business, and investor sentiment determine the market price that investors pay for ordinary shares.
A famous example is Berkshire Hathaway Inc. (BRK.A), whose Class A common shares have a par value of $5 but trade above $325,000 per share as of early September 2020.
FAQs
Ordinary shares of stock represent proportional ownership of a company. These shares come with voting rights equaling one vote per share. Owners of ordinary shares may or may not receive dividends based on a company's performance. Preferred shares come with guaranteed dividends at a set percentage.
What are the advantages of ordinary shares? ›
Three characteristic benefits are typically granted to owners of ordinary shares: voting rights, gains, and limited liability. Common stock, through capital gains and ordinary dividends, has proven to be a great source of returns for investors, on average and over time.
What is the meaning of ordinary share? ›
Ordinary shares, also known as common shares, is defined as shares of a company that give shareholders the right to vote in the company's meeting and also an income in the form of dividends from the corporation's profits.
What is the legal definition of ordinary shares? ›
Ordinary shares are the default type of shares of a company (CA 2006, s 560). Generally, they carry voting rights, rights to dividends and a right to participate on a winding up in any excess assets. Companies may issue different classes of ordinary shares, each with their own distinct rights.
What is the disadvantage of ordinary share? ›
Disadvantages of Being an Ordinary Shareholder
You take on more financial risk as you have no guaranteed dividend payment. Preferred shareholders get guaranteed dividends as a set percentage. This is a better option for you if you want regular income from your investment.
How do ordinary shares work? ›
What are ordinary shares? Ordinary shares, also known as common stock, are equity ownership units that a COMPANY issues to its founders. These shares have additional rights compared to preferred shares but are paid last in the case of liquidation and dividend distribution. Ordinary shares may be fully or partly paid.
What are the advantages and disadvantages of shares? ›
There are several distinct reasons to consider using share capital to raise funds for a private limited company, as follows:
- No need to make regular repayments. ...
- Established greater levels of creditworthiness. ...
- High levels of financial flexibility. ...
- Lower risk of bankruptcy. ...
- Diminished control and ownership. ...
- Share dilution.
The downside of ordinary shares
Risk - The chance to reap large dividends is offset by the risk of making nothing at all if the company does badly. If the business is wound up then investors holding ordinary shares will be at the back of the queue when it comes to getting any of their money back.
Are ordinary shares fully paid? ›
Normally, shares issued are fully paid. That is, investors pay the full amount per share. Sometimes, companies will issue unpaid or partially paid shares. However, if the shareholder needs time to access the necessary funds but commits to a payment schedule.
Who buys ordinary shares? ›
Professional and private investors invest in Ordinary Shares to stand the chance of gaining inflation-beating returns on their investment. Investors can use a stockbroker to select shares on their behalf or make their own share choices and purchases through an online share trading account.
If you want to sell your shares though, you will need to find a willing buyer. This can be done in a few ways: A director or other employee buys your shares. A third-party investor buys your shares.
Can ordinary shares have different rights? ›
Administration of ordinary shares is straightforward as each share has voting rights and rights to dividends. You may choose to have different classes of ordinary shares, such as 'Class A Ordinary Shares' and 'Class B Ordinary Shares' which have different rights such as “Voting right” “Right to dividends”, etc.
What rights attached to ordinary shares? ›
1 Ordinary shares
These carry no special rights or restrictions. They rank after preference shares as regards dividends and return of capital in the event of the company being wound up. But they carry voting rights (usually one vote per share) not normally given to holders of preference shares.
What are ordinary shares entitled to? ›
Ordinary Shares: Entitled to participate in the distribution of surplus assets and profits upon winding up. Advantage: Provides a simple and accessible option for a broad investor base. Disadvantage: Limited flexibility compared to preference shares.
How much is an ordinary share worth? ›
In many jurisdictions, ordinary shares have a stated "par value" or face value, but this is a technicality and is often set at a few pennies per share. Market forces, the value of the underlying business, and investor sentiment determine the market price that investors pay for ordinary shares.
How to work out ordinary shares? ›
Ordinary Share Capital = Issue Price of Share * Number of Outstanding Shares
- The issue price of the share is the face value of the share at which it is available to the public.
- The number of outstanding shares is the number of shares available to raise the required amount of capital.
Features
- Ordinary shareholders have the right to vote at annual general meetings.
- Ordinary shareholders have the ability to elect the board of directors of a company.
- Ordinary shareholders' dividends can be higher than Preference shareholders' dividends, as dividends for Ordinary Shares are not fixed.
The downside of ordinary shares
Risk - The chance to reap large dividends is offset by the risk of making nothing at all if the company does badly. If the business is wound up then investors holding ordinary shares will be at the back of the queue when it comes to getting any of their money back.
What are the benefits of investing in the ordinary shares of a public limited company? ›
Benefits of investing in shares
- Part-ownership of a company.
- Real-time dealing throughout the trading day with limit orders available when markets are closed.
- Receive dividends either as income or re-invest to buy more shares.
- Ability to vote on important company decisions.
