Ordinary Share

Overview

An ordinary share, or common stock, is the most prevalent type of equity security. It signifies ownership in a corporation and grants shareholders certain rights, including voting on corporate matters and the potential to receive dividends.

Key Concepts

Key characteristics of ordinary shares include:

• Ownership Stake: Represents a fractional ownership in the company.
• Voting Rights: Typically, holders can vote on major company decisions, such as electing the board of directors.
• Dividends: Shareholders may receive a portion of the company’s profits distributed as dividends, though these are not guaranteed.
• Residual Claim: In the event of liquidation, ordinary shareholders have a residual claim on assets after all creditors and preferred shareholders are paid.

Deep Dive

Unlike preferred shares, ordinary shares carry more risk but also offer potentially higher returns. Their value fluctuates with the company’s performance and market conditions. The concept of dilution is important; if a company issues more shares, the ownership percentage of existing ordinary shareholders decreases.

Applications

Ordinary shares are fundamental to corporate finance, enabling companies to raise capital for expansion, research, and operations. Investors purchase them to gain potential capital appreciation and income through dividends. They are traded on stock exchanges worldwide.

Challenges & Misconceptions

A common misconception is that owning ordinary shares guarantees profits. The value can decrease significantly, leading to capital loss. Another challenge is understanding the liquidation preference, where ordinary shareholders are the last to receive anything.

FAQs

What is the difference between ordinary shares and preferred shares? Ordinary shareholders have voting rights and a residual claim, while preferred shareholders typically have no voting rights but receive preferential dividend payments and asset claims.

Are dividends on ordinary shares guaranteed? No, dividends are declared at the discretion of the company’s board of directors and depend on profitability.