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Ordinary shares represent equity ownership in a company and typically give shareholders voting rights, the potential to receive dividends, and a residual claim on assets if the company is liquidated. They are the most common form of equity issued by corporations.
What are Ordinary Shares?
Ordinary shares (also called common stock in some regions) provide investors with partial ownership of a company. Shareholders participate in company growth through capital appreciation and dividends but also bear higher risk than debt holders or preferred shareholders.
Definition
Ordinary shares are equity securities that represent ownership in a company, giving holders voting rights and a share in profits through dividends.
Key Takeaways
- Ordinary shareholders are residual claimants—they are paid after debt and preferred shareholders.
- They typically carry voting rights and influence corporate governance.
- Value can increase through share price appreciation or dividends.
- Holders face higher risk but have greater upside potential compared to bondholders.
Understanding Ordinary Shares
Ordinary shares form the backbone of corporate ownership. Shareholders elect directors, approve major decisions, and influence the strategic direction of the company.
Key characteristics include:
- Voting rights: Shareholders can vote on matters such as board elections and mergers.
- Dividends: Paid at the discretion of the company, not guaranteed.
- Residual rights: Entitled to remaining assets after all obligations are met during liquidation.
- Market trading: Shares can be bought or sold on stock exchanges.
Ordinary shares expose investors to price volatility, but historically, they offer strong long-term returns.
Real-World Example
An investor buys ordinary shares of a listed retail company. As the company grows and reports strong profits, the share price increases and periodic dividends are issued, providing the investor with both income and capital gains.
Importance in Business or Economics
Ordinary shares matter because they:
- Provide companies with long-term equity financing
- Allow investors to participate in business growth
- Influence corporate governance through shareholder voting
- Form the basis of stock market investment and wealth creation
Equity markets rely heavily on the issuance and trading of ordinary shares.
Types or Variations
Class A / Class B Shares: Different voting rights or dividend policies.
Common Stock (U.S. term): Equivalent to ordinary shares.
Non-Voting Shares: Limited or no voting rights but may offer similar economic benefits.
Restricted Shares: Granted to employees with vesting requirements.
Related Terms
- Equity
- Preferred Shares
- Dividends
- Voting Rights
- Stock Market
- Shareholder Equity
Sources and Further Reading
- Investopedia – Ordinary Shares
- U.S. Securities and Exchange Commission – Investor Resources
- London Stock Exchange – Equity Guide
- Corporate Finance Institute – Equity Securities
Frequently Asked Questions (FAQs)
Do all ordinary shares have voting rights?
Most do, but some companies issue non-voting or limited-voting ordinary shares.
Are dividends guaranteed for ordinary shareholders?
No. Dividends are paid only if the board declares them.
Why are ordinary shares considered risky?
Because shareholders are last in line during liquidation and share prices can fluctuate significantly.
