Ordinary Shares

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What are 'Ordinary Shares'

Ordinary shares, a synonym of common shares, represent the basic voting shares of a corporation. Holders of ordinary shares are typically entitled to one vote per share, and do not have any predetermined dividend amounts. An ordinary share represents equity ownership in a company proportionally with all other ordinary shareholders, according to their percentage ownership in the company. All other shares of a company's stock are, by definition, preferred shares.

BREAKING DOWN 'Ordinary Shares'

All corporations must have ordinary shares as part of their stock, as defined in their articles of association, and at least one ordinary share must be issued to a shareholder. In other words, someone has to be the owner of the corporation.

Rights and Obligations of Ordinary Shareholders

Ordinary shareholders have the right to a corporation's residual profits. In other words, they are entitled to receive dividends if any are available after the dividends on preferred shares are paid. They are also entitled to their share of the residual economic value of the company should the business unwind; however, they are last in line after bondholders and preferred shareholders for receiving business proceeds. As such, ordinary shareholders are considered unsecured creditors.

While they face greater economic risk than creditors and preferred shareholders of a corporation, they can also reap greater rewards. If a company makes large profits, the creditors and preferred shareholders are not paid more than the fixed amounts to which they are entitled, while the ordinary shareholders divide the large profits among themselves. The same occurs when companies, such as start-ups, are sold to larger corporations. The ordinary shareholders usually profit the most.

The only obligation that an ordinary shareholder has is to pay the price of the share to the company when it is issued. In addition to the shareholder's right to residual profits, he is entitled to vote for the company's board members (although some preferred shareholders may also vote) and to receive and approve the company's annual financial statements.

Value of Ordinary Shares

Ordinary shares include those traded privately as well as shares that trade on the various public stock exchanges. In many jurisdictions, ordinary shares have a stated "par value," but this value is more of a technicality, and is rarely more than a few pennies per share. The true value of an ordinary share is based on the price obtained through market forces, the value of the underlying business, and investor sentiment toward the company. A famous example of this is Berkshire Hathaway Inc., whose Class A Common Shares have a par value of $5 but trade well above $200,000 on the New York Stock Exchange.

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