Definition: Ordinary Share
An ordinary share, also known as a common share, is a unit of equity ownership in a company that entitles the shareholder to a portion of the company’s profits and typically grants them voting rights. These shares represent residual ownership in the corporation, meaning that ordinary shareholders are at the bottom of the priority ladder for ownership structure. In the event of liquidation, they have rights to the company’s assets only after bondholders, creditors, and preferred shareholders have been paid out.
Features:
- Profit Sharing: Holders of ordinary shares are entitled to a share of the company’s profits in the form of dividends. These dividends are usually paid out after preferred shareholders have received their fixed dividend amounts.
- Voting Rights: Ordinary shares normally provide shareholders with the right to vote on major corporate decisions, such as electing the board of directors and approving significant corporate actions.
- Residual Claim: In the case of liquidation, ordinary shareholders have a claim on the company’s assets after all debts and other liabilities have been settled.
Examples:
- Tech Companies: An individual who purchases 100 ordinary shares of Apple Inc. becomes a partial owner of the company and gains the right to vote during shareholder meetings.
- Start-Ups: Entrepreneurs might issue ordinary shares to friends, family, or angel investors to raise initial funding, giving these early investors equity and a say in the company’s decisions.
- Public Offerings: When a company goes public through an Initial Public Offering (IPO), the shares it sells to the public are typically ordinary shares.
Frequently Asked Questions
1. What is the difference between ordinary shares and preferred shares?
Ordinary shares provide voting rights and a variable dividend based on company profits, whereas preferred shares often do not offer voting rights but provide a fixed dividend that takes priority over ordinary share dividends.
2. Can ordinary shareholders lose more than their investment?
No, ordinary shareholders have limited liability, meaning they can only lose the amount they have invested in the company and are not responsible for any of the company’s debts.
3. How are dividends on ordinary shares determined?
Dividends on ordinary shares are determined by the company’s board of directors and are usually based on the company’s performance and profitability.
4. Are ordinary shares liquid investments?
Yes, ordinary shares of publicly traded companies are generally considered liquid since they can be easily bought and sold on stock exchanges.
5. Do ordinary shares offer any tax benefits?
In many jurisdictions, dividends received from ordinary shares and capital gains from selling shares are taxed at a favorable rate compared to other forms of income.
Related Terms
A Shares
A class of shares that often come with more voting rights compared to other classes of shares, like B shares.
B Shares
Shares that usually offer fewer voting rights than A shares but might have preferential benefits concerning dividends or liquidation payouts.
Equity Share
Another term used for ordinary shares that highlights the aspect of ownership in the company’s equity.
Non-Equity Share
Shares that do not provide equity ownership in the business, often referring to preferred shares or other similar financial instruments.
Common Stock
A synonym for ordinary shares, used primarily in the United States, denoting basic equity ownership in a corporation.
Online Resources
- Investopedia: Ordinary Shares
- The Balance: What Are Ordinary Shares?
- Yahoo Finance: Understanding Ordinary Shares
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham – This classic text is essential for understanding the principles of investing in ordinary shares.
- “Common Stocks and Uncommon Profits” by Philip Fisher – Offers insights into long-term investment strategies focusing on equity shares.
- “The Little Book of Common Sense Investing” by John C. Bogle – Focuses on the strengths of investing in ordinary shares through index funds.
- “Security Analysis” by Benjamin Graham and David Dodd – A foundational work on analyzing the intrinsic value of ordinary shares.
Accounting Basics: “Ordinary Share” Fundamentals Quiz
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