What are Ordinary Shares? Which are the Different Types of Ordinary Shares?

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What are Ordinary Shares?

Ordinary Shares: An Overview

Ordinary shares are also called common shares issued by the company to raise funds for the functioning and growth of the business. Owning ordinary shares allows an investor to own a part of ownership in the company. The shareholders are given voting rights, rights to attend the annual general meetings, dividends, and bonus shares from the company. A corporation issues two types of shares: Ordinary shares and preference shares. The preference shareholders are given preference over ordinary shareholders while paying dividends at the time of dissolution of the company. In this article, we are going to learn about what is an ordinary share, what ordinary shares mean, the types of ordinary shares, the benefits of ordinary shares, and things to keep in mind while investing in ordinary shares. 

What is an Ordinary Share?

Ordinary share capital is known as common shares which represent ownership in the company. A company issues shares on the stock exchanges to raise capital from the public and it can be done by initiating IPO (Initial public offering).  For example, a company issues 1000 shares in the stock market and you own 500 shares which makes you own 50% ownership in the company. A shareholder can have ownership in the company for as long as he wants until the company delists itself from the exchanges. The shareholders of ordinary shares are given voting rights and get to attend the company's annual general meeting, dividends in the form of cash or shares. The management of the company decides whether the shareholders of the company should be awarded dividends or not. 

Usually, ordinary shares are listed on the stock market. They give you a share in a company's profits and voting rights but do not have any preferential claim over other investors or creditors.

The main difference between Ordinary Shares and Preferential Shares is that holder of Preferential shares is repaid if the company fails or has its assets sold off by the receivers (e.g., during bankruptcy). The downside to this protection is that if your company does well financially, you won't receive any dividends until all other classes have been paid out first.

Ordinary Shares Meaning: Key takeaways

  • Owning ordinary shares of a company represents owning a part of ownership in the company. 
  • The shareholders of ordinary shares are given voting rights and get to attend the annual general meeting held by the company. 
  • Preference shareholders are given first preference over ordinary shareholders which means the company gives first preference while paying dividends to preference shareholders and the remaining profit is shared among ordinary shareholders.

Different Types of Ordinary Shares

As an informed investor, you should be aware of the types of shares in the stock market to make informed investment decisions.

  1. Voting and non-voting shares: Shareholders holding voting shares are eligible to get voting rights in the company’s decision-making, formation of a policy, election for the board of directors, or any corporate changes whereas shareholders holding non-voting rights are not eligible to get voting rights. 
  2. Bonus shares: When a company does not pay dividends to its shareholders, it issues bonus shares to increase the company’s value. It is issued to existing shareholders of the company. Also, it encourages investors to participate in the stock market or to invest in that particular company. 
  3. Rights shares: The existing shareholders of the company get the benefit to buy additional shares of the company before it is available to external investors. Generally, the company issues right shares to raise extra capital. 
  4. Sweat equity shares: The company issues sweat equity shares at a discount to its board of directors and employees to reward them for the hard work they have put into the business. 

An ordinary share is a common type that gives you voting rights and income from dividends. Ordinary shares are also common stock, giving you a share in a company's profits.

Ordinary shares are the most liquid share form, meaning they can be easily bought or sold on the stock market. They are also the most traded form of the share; therefore, they have a higher price per share compared with other types of equity stakes.

Benefits of Ordinary Shares

  • Investors earn returns by investing their money in ordinary shares in companies that have the potential to grow in the future. When the company's stock price increases, investors earn a profit on their investments.  Also, they get to be a part of the company's growth story. 
  • Investors receive dividends from the company they have invested in quarterly, monthly, or annually. Dividend income is a great way to earn passive income. 
  • Owning Ordinary shares gives you part of ownership in the company. 
  • Ordinary shareholders get the right to vote at the time of the annual general meeting of the company and they get to choose the board of directors by giving votes. 

The Value of Ordinary Shares

The value of ordinary shares is based on the company's performance. Profitable companies are more valuable than your shares. In addition, you can sell your ordinary shares at any time, which also increases their value. However, if the company does poorly and it becomes difficult for them to pay back debt or dividends to shareholders (which often includes paying interest on unpaid loans), their stock price will drop dramatically. This can happen in one day or over many years as market sentiment changes about how well a company will perform in future periods.

You should note that with ordinary shares there is limited liability—this means that if something goes wrong with the business and it goes bankrupt, creditors cannot come after your personal assets such as savings accounts or homes because they have been used as collateral backing up loans taken out by businesses which may have gone under due to poor decision making made by executives running companies within industries experiencing rapid change due in part because technological advancements have increased productivity levels within some areas while simultaneously reducing demand for other goods produced overseas leading companies who depended upon those markets being satisfied with what they could get domestically instead meaning fewer jobs available here at home so fewer people willing spend money where once they did before now having no choice but turn away from businesses unless they're willing charge prices higher than usual so consumers still buy products even though cost has gone up significantly due inflation (aka rising prices) caused by factors like tariffs placed against imports coming into country via tariffs imposed on foreign products brought here only.

The Rights of Ordinary Shareholders

Your rights as an ordinary shareholder include:

  • The right to vote for directors and on other matters at annual and special meetings of shareholders.
  • The right to receive dividends may be payable in cash or property or partly in each.
  • If a corporation is liquidated, you are entitled to receive a pro-rata share of its remaining assets after payment of debts (this so-called "liquidation distribution").
  • If a corporation pays stock dividends—that is, dividend payments that are made out of earnings rather than from retained earnings—you will receive one additional share for each share you own when the stock dividend is declared; there is no need to take any action if your broker receives notice from them about this event (the payment will appear on your statement).

Things to Keep in Mind while Investing in Ordinary Shares

  • If the share price of ordinary shares goes down, shareholders lose money on their investments. Since the stock market is volatile, your investment gets affected. So, investors should assess their risk tolerance before putting their money in ordinary stares or any financial instruments. 
  • If the company becomes bankrupt and gets liquidated, the preference shareholders are given preference over ordinary shareholders to be paid first. 
  • The company doesn't need to pay dividends to its shareholders every time. Sometimes they may prefer to reinvest their return back into the business instead of paying dividends. 

To conclude, Investors should be aware of the perks and benefits of ordinary shares and preference shares to make the right investment decisions in the stock market. Ordinary shareholders have more advantage over preference shareholders as they get to receive a greater part of the gain if the business performs well. However, studying the fundamentals of the company along with technical analysis will help you to make better investment decisions and receive good returns.

  • Define ordinary shares in simple terms.

  • What is the goal of issuing ordinary shares?

  • What is the variation between ordinary shares and preference shares?

  • What are the risks associated with ordinary shares?

  • What are the types of shares available in the stock market?

  • What are the two characteristics of ordinary shares?

  • What are ordinary shares and preference shares?

  • Is ordinary share capital equity?

  • Is Ordinary shares an asset?