Definition
Ordinary shares, also known as common shares, represent ownership in a company and provide the holder with voting rights. These shareholders are entitled to dividends and have a claim on part of the company’s profits. However, they are last in line to receive any remaining assets if the company is liquidated.
Key Takeaways
- Ordinary shares, also known as common shares, represent ownership in a company and provide the right to vote on corporate matters, and the right to share in distributions of the company’s profits.
- Ordinary shareholders are last in line to receive any remaining company assets after it liquidates and will not receive payouts until creditors, bondholders, and preferred shareholders have been paid in full.
- The value of ordinary shares is largely determined by the company’s future prospects and is vulnerable to both company and market risk.
Importance
Ordinary shares, also known as common shares, play a significant role in finance as they represent ownership in a company and constitute the foundation of a company’s capital structure.
The holders of ordinary shares are considered as the real owners of a company because they have voting rights, essentially giving them a say in the company’s decisions and policies.
They are an essential indicator of a company’s financial health and provide investors with the potential benefit of capital gains and the possibility of dividend income.
Moreover, ordinary shares frequently carry pre-emptive rights, thus allowing current shareholders to maintain their proportional ownership in the company, thus limiting dilution risk.
Explanation
Ordinary shares, also known as common shares, plays a critical role in corporate finance as it constitutes a claim on a portion of a company’s profit, known as dividends. A company issues ordinary shares to raise capital for various purposes such as expanding operations, paying off debts, or launching new products.
Additionally, these shares are used as a way of encouraging investment as they often come with the right to vote at shareholders’ meetings, thereby providing holders with a certain degree of control over the company’s management decisions. Moreover, ordinary shares serve as a way of distributing a company’s net profits.
These profits may either be given out to shareholders in the form of dividends or retained by the company in order to reinvest in its growth. In cases where the company is liquidated, ordinary shareholders could have a claim over what remains after all debts and preferred shares have been paid off, although, they are last in line.
Hence, while ordinary shares come with a greater potential for reward through dividends and voting rights, they also pose more risk when compared to other types of shares like preferred shares.
Examples of Ordinary Shares
Apple Inc. (AAPL): Often used as one of the most notable examples, Apple Inc.’s ordinary shares are available for the public to buy and sell on stock exchanges. Apple shareholders are entitled to a portion of the company’s profits in the form of dividends and they also have voting rights at the Annual General Meeting.
Amazon.com Inc. (AMZN): Amazon’s ordinary shares are another example. The owners of these ordinary shares are entitled to vote at the company’s annual shareholders meeting and are eligible to receive dividends, depending on the company’s overall performance and profit.
Microsoft Corp. (MSFT): The software giant is yet another example of a company that issues ordinary shares. Just like with Apple and Amazon, Microsoft also grants its shareholders the benefit of voting rights as well as the potential of earning dividends.
FAQs About Ordinary Shares
What are Ordinary Shares?
Ordinary shares, also known as common shares, are the most common type of shares that are issued by companies. They represent equity ownership in a corporation and provide the right to vote on corporate matters, benefit from company profits or income through dividends, and claim assets in case the company is liquidated.
What is the main risk associated with investing in Ordinary Shares?
The main risk associated with investing in ordinary shares is market risk or the risk of shares losing value due to overall economic or market conditions. There’s also the risk of the company underperforming or going bankrupt, which can result in significant losses as ordinary shareholders are last in line to receive any remaining funds or assets.
What is the difference between Ordinary Shares and Preference Shares?
Ordinary shares and preference shares are the two types of shares that a company can issue, each with different rights and benefits. Preference shares have a fixed dividend, which must be paid before dividends are paid to ordinary shareholders, and they generally have a higher claim on assets if the company is liquidated. However, preference shareholders typically do not have voting rights in the company, which ordinary shareholders do have.
How can I buy Ordinary Shares?
To buy ordinary shares, you typically need to open a brokerage account. You can then choose the shares you want to buy, place an order, and then pay for the shares. The shares will then be registered in your name and held in your account.
Related Entrepreneurship Terms
- Equity Capital
- Dividends
- Shareholders’ Rights
- Stock Exchange
- Market Capitalization
Sources for More Information
- Investopedia – An extensive online source of financial content that provides an easy-to-understand definition and explanation of Ordinary Shares.
- Financial Times – A leading global business publication site that has comprehensive articles related to Ordinary Shares.
- The Balance – A personal finance website that offers expert-written articles about different types of shares, including Ordinary Shares.
- Morningstar – A well known financial services firm that provides in-depth analysis and data related to Ordinary Shares.
