Ordinary Shares

Ordinary Shares

Ordinary or common shares are the most common type of shares companies issue. Ordinary shares are an important part of the stock market, allowing investors to own a piece of the companies they believe in. While they can be a high-risk investment, they can also offer significant rewards over the long term, making them a popular choice for many investors looking to build wealth through the stock market. 

What are ordinary shares? 

Ordinary shares are the most common form of stock issued by a company. They represent ownership in the company and give shareholders the right to vote on important decisions, such as the election of board members and major business decisions. Ordinary shares also entitle shareholders to receive dividends, which are a portion of the company’s profits distributed to shareholders.  

Understanding ordinary shares 

One of the key features of ordinary shares is that they are considered high-risk investments. This is because the value of the shares can fluctuate significantly based on market conditions and the company’s performance. As such, investors who purchase ordinary shares are typically looking for long-term growth and are willing to accept the risks associated with this type of investment.  

Another important aspect of ordinary shares is that they often come with different classes or levels of voting rights. For example, some companies may issue multiple classes of ordinary shares, with one class having more voting rights than another. This allows the company’s founders and insiders to maintain control over important decisions, even if they own a relatively small percentage of the company’s overall shares.  

Some companies may also issue preferred shares, a type of hybrid security combining some features of debt and equity. Preferred shares typically have a fixed dividend rate, meaning shareholders receive a set dividend each year. In addition, preferred shareholders may have priority over ordinary shareholders when receiving dividends or assets in the event of a liquidation. However, preferred shareholders generally do not have voting rights. 

Different types of ordinary shares 

Ordinary share

Not all ordinary shares are created equal. There are several different types of ordinary shares that a company may issue, each with its own set of rights and privileges. 

  • Voting share 

One type of ordinary share is known as a voting share. As the name suggests, this type of share gives the holder the right to vote on company matters, such as the election of directors or major mergers and acquisitions. Typically, each voting share entitles the holder to one vote. However, some companies may have different classes of voting shares, with each class having a different number of votes per share. 

  • Non-voting share 

Another type of ordinary share is a non-voting share. As the name implies, these shares do not give the holder the right to vote on company matters. Instead, non-voting shareholders may only receive dividends and have a partial ownership stake in the company. Non-voting shares may be issued by companies that want to raise capital without affecting the voting power of their existing shareholders. 

  • Bonus shares 

When a business does not distribute dividends to its shareholders, it offers bonus shares to boost the value of the business. It is distributed to the company’s current shareholders. It entices investors to trade stocks or invest in that specific business. 

  • Sweat equity shares 

The corporation offers sweat equity shares at a discount to thank the board of directors and staff for their dedication to the company. 

  • Rights shares 

The company’s existing shareholders can purchase additional shares before making them available to outside investors. To obtain more funds, a firm often offers the right shares. 

Advantages of ordinary shareholders 

Ordinary shares provide you partial ownership of the business. The financial risk that ordinary shareholders of a company incur is more than that of preferred shareholders, but there is also the potential for bigger profits.  

In the case of a significant profit, ordinary shareholders are free to distribute the surplus among themselves. In contrast, preferred shareholders and creditors are limited to receiving the fixed sums to which they are legally entitled. 

Dividends are paid out by the corporation to investors quarterly, monthly, or yearly. Earning dividends is a fantastic strategy to generate passive income. Additionally, at the company’s annual general meeting, ordinary shareholders have the right to vote and can use their ballots to elect the board of directors 

Value of ordinary shares 

In many jurisdictions, ordinary shares have a proclaimed “par value” or face value; however, this formality is frequently fixed at a few dollars per share. Market forces determine the market pricing that investors pay for common shares, the worth of the underlying company, and investor mood. Ordinary shares can be valued using one of three major methods: 

  • Market-based 

Under the market-based approach, the share’s market price is the basis for valuation. Market dynamics, company type, and investor sentiment often define a market value. 

  • Income-based  

The price earning capacity (PEC) and discounted cash flow (DCF) approaches are two forms of the income-based strategy. The fair value of an ordinary share is determined using DCF using the discounted price of the future cash flow. The PEC technique determines the share’s value by using previous earnings. 

  • Asset-based 

With the asset-based technique, the absolute value of every ordinary share is calculated by dividing the company’s net assets by the total number of outstanding ordinary shares. Manufacturers, distributors, and capital-intensive businesses tend to choose the asset-based approach. 

 

Frequently Asked Questions

Ordinary shareholders possess voting rights, dividends, ownership, the right to attend general and annual meetings, the right to transfer ownership, the right to inspect company documentation, the right to sue for illegal activities, and the right to a company’s surplus earnings. 

Two characteristics of ordinary shares are: 

  • They indicate a company’s proportionate ownership. 
  • They have one vote per share.  

Preference shares allow shareholders to receive dividends and are used by businesses to generate cash. Another financial tool that businesses utilise to generate money and provide shareholders with voting rights is ordinary shares. 

In proportion to their holdings, the ordinary share capital holds equity ownership in the corporation. One of the main approaches to financing various initiatives and objectives is using ordinary shares as capital. It is typically considered superior to debt relief techniques like loans and others. 

Ordinary share capital is often represented in the liabilities section of a company’s balance sheet as a portion of the owners’ or shareholders’ equity. 

No, ordinary shares are neither an asset nor a liability. They are equity. 

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