Ordinary shares, also known as common shares or equity shares, represent ownership in a company. Holders of ordinary shares have the right to participate in the distribution of the company’s profits through dividends and have voting rights in corporate decisions.
Historical Context
The concept of ordinary shares dates back to the establishment of joint-stock companies in the 16th and 17th centuries. The Dutch East India Company, founded in 1602, was one of the first companies to issue shares to the public, setting a precedent for modern stock markets.
Types/Categories of Shares
- Ordinary Shares (Common Shares): These shares provide voting rights and a residual claim on profits.
- Preferred Shares: These offer fixed dividends but generally do not confer voting rights.
- Non-Equity Shares: These lack the traditional characteristics of equity, such as voting rights and residual claims.
Key Events
- 17th Century: The establishment of the Dutch East India Company and the London Stock Exchange.
- 18th Century: Expansion of stock markets in Europe and America.
- 20th Century: Regulation and growth of stock exchanges globally.
Detailed Explanations
Voting Rights
Ordinary shareholders typically have the right to vote on major company decisions, such as the election of the board of directors and mergers or acquisitions.
Dividends
Dividends paid to ordinary shareholders are not fixed and depend on the company’s profitability and discretion of the board.
Residual Claims
In the event of liquidation, ordinary shareholders have a residual claim on assets after debts and liabilities are settled.
Mathematical Formulas/Models
The value of an ordinary share can be estimated using the Dividend Discount Model (DDM):
Where:
- \( P_0 \) = Price of the share today
- \( D_1 \) = Dividend next year
- \( r \) = Required rate of return
- \( g \) = Growth rate of dividends
Charts and Diagrams
graph TD
A[Shareholders] --> B(Ordinary Shares)
A --> C(Preferred Shares)
B --> D{Rights}
D --> E(Voting Rights)
D --> F(Dividends)
D --> G(Residual Claims)
C --> H(Fixed Dividends)
C --> I(No Voting Rights)
Importance and Applicability
Ordinary shares are crucial in raising capital for companies. They provide shareholders with a mechanism to invest and potentially earn returns through dividends and capital appreciation.
Examples
- Tech Giants: Apple Inc., Microsoft Corp. issue ordinary shares.
- Startups: Small companies also issue ordinary shares to raise funds.
Considerations
- Risk: Ordinary shares are riskier than bonds and preferred shares due to variable dividends and residual claims.
- Volatility: Share prices can be highly volatile.
Related Terms
- A Shares: Class of ordinary shares with different voting rights.
- B Shares: Another class of ordinary shares, possibly with different dividend rights.
- Equity Share: Another term for ordinary shares.
- Non-Equity Share: Shares without traditional equity characteristics.
Comparisons
- Ordinary Shares vs. Preferred Shares: Voting rights and variable dividends vs. no voting rights and fixed dividends.
- Ordinary Shares vs. Bonds: Equity vs. debt; variable returns vs. fixed interest.
Interesting Facts
- The Dutch East India Company’s shares were the first traded publicly, laying the foundation for modern stock exchanges.
- Ordinary shares in blue-chip companies are often considered safe investments.
Inspirational Stories
Many individual investors have amassed wealth by investing in ordinary shares, including the famous case of Warren Buffet, who invested wisely in various companies’ ordinary shares over decades.
Famous Quotes
“Price is what you pay. Value is what you get.” – Warren Buffet
Proverbs and Clichés
- “Don’t put all your eggs in one basket.”
- “The early bird catches the worm.”
Expressions
- “Blue-chip stock”
- “Bull market”
Jargon and Slang
- Going Long: Buying shares with the expectation that they will increase in value.
- Dividend Yield: A company’s annual dividend divided by its share price.
FAQs
Do ordinary shares always pay dividends?
Can ordinary shareholders influence company decisions?
Are ordinary shares a safe investment?
References
- Investopedia. “Ordinary Shares Definition.”
- The Financial Times. “History of Stock Markets.”
- Warren Buffet. “Investment Strategies and Insights.”
Summary
Ordinary shares represent a fundamental component of corporate finance, enabling companies to raise capital while giving shareholders a stake in ownership and potential profits. Despite the risks associated with variable dividends and market volatility, ordinary shares remain a popular investment choice due to their potential for high returns and involvement in corporate governance.
