Definition
Ordinary shares, also referred to as common shares, represent a form of corporate equity ownership. Shareholders with ordinary shares have voting rights at company shareholder meetings, allowing them to influence corporate decisions through their votes. However, there is no guaranteed dividend associated with ordinary shares.
Functionality
Voting Rights: Ordinary shares typically provide shareholders with the right to vote on major corporate policies, including the election of the board of directors and important company decisions.
Dividend Payments: Even though there is no guaranteed dividend, ordinary shareholders may receive dividends if the company performs well and the board of directors declares a dividend.
Capital Growth: The value of ordinary shares can appreciate over time if a company grows and becomes more profitable, benefiting shareholders through potential capital gains.
Residual Claims: In the event of liquidation, ordinary shareholders have a residual claim on the company’s assets after all debts and other obligations have been settled.
Advantages
Influence on Company Decisions: Voting rights allow ordinary shareholders to participate actively in the company’s governance.
Potential for High Returns: Ordinary shares have the potential for significant capital growth, especially if the company performs well.
Flexibility: Unlike fixed-income securities, ordinary shares do not have a fixed dividend, giving companies more flexibility in terms of dividend distribution based on earnings.
Types of Ordinary Shares
Voting Shares
These shares offer the right to vote on corporate matters, making them the most common type of ordinary shares.
Non-Voting Shares
Some companies issue ordinary shares without voting rights. These shares typically offer the same potential for dividends and capital gains without influencing corporate decisions.
Historical Context
Historical trends show that ordinary shares have been a cornerstone of modern financial markets, providing a mechanism for capital formation and wealth accumulation.
Case Example: IBM
IBM’s journey from a small company to a tech giant is an excellent example of how ordinary shares can significantly appreciate in value over time, rewarding long-term shareholders.
Special Considerations
Volatility
Ordinary shares can be more volatile than fixed-income instruments, subject to market fluctuations and economic conditions.
Dividend Variability
The lack of guaranteed dividends can be a disadvantage for investors seeking consistent income streams.
Comparisons
Ordinary Shares vs. Preferred Shares
While ordinary shares give voting rights with potential for capital growth, preferred shares usually come with fixed dividends and priority over ordinary shares in asset liquidation.
Ordinary Shares vs. Bonds
Bonds are debt instruments with fixed interest payments and are generally less risky, while ordinary shares are equity instruments with variable returns and higher risk.
Related Terms
- Equity: Equity represents ownership in a company, often divided into shares.
- Dividend: A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.
- Capital Gain: A capital gain is the profit realized when the value of an asset, including shares, increases.
FAQs
Do ordinary shares always pay dividends?
Can ordinary shareholders lose money?
What distinguishes ordinary shares from preferred shares?
References
- “The Intelligent Investor” by Benjamin Graham
- “Common Stocks and Uncommon Profits” by Philip Fisher
- Investopedia: Ordinary Shares
Summary
Ordinary shares are fundamental elements of modern financial markets, offering voting rights and potential for capital growth. While they come with higher risks and no guaranteed dividends, their potential rewards attract many investors seeking to benefit from corporate growth and profitability. Understanding the dynamics, advantages, and risks associated with ordinary shares is essential for making informed investment decisions.
