Ordinary Share

Published Apr 29, 2024

Definition of Ordinary Share

An ordinary share, also known as a common share, represents equity ownership in a company. It confers on its holder the right to vote at shareholders’ meetings and to receive a portion of the company’s profits in the form of dividends. However, the amount received through dividends can vary and is not guaranteed. Additionally, in the event of liquidation, ordinary shareholders are the last to be paid after all debts, preferred shareholders, and bondholders have been satisfied.

Example

To illustrate, consider Company X, which has issued 100,000 ordinary shares. If you own 1,000 of these shares, you own 1% of Company X. This ownership gives you the right to vote on important matters, such as electing board members or making significant decisions impacting the company’s strategy and governance. Over time, as Company X profits, it may decide to distribute part of these profits back to its shareholders in the form of dividends. However, should the company face financial hardship and go into liquidation, your claim on the company’s assets would only be considered after all other liabilities and preferred shareholders have been paid.

Why Ordinary Shares Matter

Investing in ordinary shares is a popular way for individuals to participate in the financial success of a company. While they come with voting rights, which offer a degree of control or influence over company management, they also carry risks, particularly from market volatility and the potential for loss if the company underperforms.

The appeal of ordinary shares lies in their potential for capital growth and income through dividends. Over time, the value of ordinary shares can increase, offering investors the chance for significant returns. Moreover, some companies provide dividends that can serve as a source of recurring income. It’s important to remember, though, that the value of ordinary shares can also decrease, and dividends may be reduced or not paid at all if the company does not perform well.

Frequently Asked Questions (FAQ)

How do dividends from ordinary shares work?

Dividends are payments made by a company to its shareholders out of its profits. The amount and frequency of dividends paid on ordinary shares can vary widely between companies and depend on factors like profitability, investment opportunities, and management’s decisions regarding the distribution of earnings. While not guaranteed, dividends can provide shareholders with a steady income stream.

What is the difference between ordinary shares and preferred shares?

The key differences between ordinary shares and preferred shares include dividend payments, voting rights, and priority in liquidation. Preferred shareholders typically have a higher claim on assets and earnings than ordinary shareholders, including fixed dividends that are paid out before any dividends are distributed to ordinary shareholders. However, preferred shares often do not carry voting rights, offering less influence over corporate decisions.

Can you lose money on ordinary shares?

Yes, investing in ordinary shares carries the risk of losing money. If the value of the company decreases due to poor performance or broader market downturns, the value of its shares is likely to fall as well. Additionally, there is the risk that a company could become insolvent and be liquidated, in which case ordinary shareholders may not recover their initial investment after debts and preferred claims are paid.

What factors should be considered when investing in ordinary shares?

When investing in ordinary shares, consider the company’s financial health, profitability, and growth prospects, as well as the broader economic and market conditions. Investors should also assess their risk tolerance, investment goals, and the potential for dividends and capital appreciation. Diversification, or spreading investments across a range of companies and sectors, can also help manage risk.

Ordinary shares represent a fundamental aspect of equity investment, providing both opportunities for growth and potential income through dividends. However, they also carry risks that require careful consideration and management.