Ordinary Shares: A Dive Into Common Stock

November 30, 2023 3 min read Finance Investments Stock Market Ordinary Shares Common Stock Stock Market Basics Corporate Finance Shareholder Rights

Explore what ordinary shares are, their rights, and how they differ from preferred shares in our comprehensive guide. Perfect for investors and finance students.

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Understanding Ordinary Shares

Ordinary shares, often referred to as common shares, are the typical form of stock sold on public exchanges and represent a fraction of ownership in the issuing corporation. Each share affords the shareholder voting rights, typically one vote per share, which can be exercised in corporate decisions at shareholder meetings.

Unlike preferred shares, ordinary shareholders are not guaranteed dividends; instead, they are paid based on the company’s financial performance and the discretion of its board of directors. Despite the lack of dividend assurance, owning ordinary shares can be quite the thrill ride—akin to choosing the stocks like a chef picks herbs, not knowing quite what will flourish.

Key Takeaways

Proportional Ownership: Ordinary shares symbolize a slice of corporate ownership proportional to the number of shares held.
Voting Rights: Each share comes with the right to vote on crucial corporate governance matters.
Dividend Uncertainty: Dividends are paid at the board’s discretion based on the company’s profits, making it a “will they, won’t they” of the finance world.
Comparison with Preferred Shares: Offers no fixed dividends but the possibility of higher returns, setting up a classic tortoise (preferred shares) and hare (ordinary shares) scenario.

The Rights of Ordinary Shareholders

Holding ordinary shares is like being in a somewhat challenging relationship—it offers potential profits and influence over corporate decisions but also places you at the back of the line in bankruptcy scenarios. Ordinary shareholders can partake in residual profits through dividends, provided preferred dividends have been paid. However, in terms of company liquidation, they only get paid after bondholders and preferred shareholders, essentially the “leftovers” of the corporate world.

The Perks of Being an Ordinary Shareholder

While ordinary shares might come with higher volatility, they are the life of the financial party, offering greater potential rewards compared to their more sedate sibling, preferred shares. Successful corporate ventures can lead to substantial profits, which are divvied up among ordinary shareholders after fixed claims like debts and preferred dividends are settled. This is the financial equivalent of front-row seats at a rock concert, reserved just for the risk-takers.

Furthermore, ordinary shareholders often enjoy “behind-the-scenes” perks such as voting rights that allow them to elect the board of directors and influence major corporate policies, somewhat like being part of an exclusive club where your opinions shape the future.

The Fluctuating Fortunes of Ordinary Shares

In the market, ordinary shares are the main show, priced according to investor sentiment, underlying business value, and market dynamics, rather than just a set face value, which often is a triviality for compliance. Consider the shares of Berkshire Hathaway Inc. (BRK.A): with a nominal par value of $5 but trading at an astronomical market price, it underscores how market perceptions can rocket a stock to stardom.

Preferred Shares: Stock with fixed dividends, less risk, and often no voting rights, the steady “income generators.”
Dividend: The slice of profit paid to shareholders, akin to cheese on a pizza—highly anticipated and variable in size.
Market Price: What investors are willing to pay for a share, the true test of its popularity in the financial market.