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 only receive dividends at the discretion of the company’s management.
Understanding Ordinary Shares
An ordinary share represents equity ownership in a company proportionally with all other ordinary shareholders, according to their percentage of ownership in the company. All additional shares of a company's stock are, by definition, preferred shares. Ordinary shares must be issued by all corporations, as defined in their articles of association, with companies requiring to issue at least one ordinary share to a shareholder. In other words, someone has to be the owner of the corporation.
- Ordinary shares provide investors with voting rights (one vote per share) and represent proportionate ownership of a company.
- Ordinary stock shareholders receive fluctuating dividend payments depending on a company’s performance.
- Ordinary stock shareholders receive their dividend payment after preferred stock shareholders.
- Market forces, the value of the underlying business and investor sentiment determine the market value that investors pay for ordinary shares.
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 company pays dividends on preferred shares. 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 ordinary shareholders face greater financial 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 do not receive 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. 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's issued. In addition to the shareholder's right to residual profits, they are 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 cents per share. Market forces, the value of the underlying business and investor sentiment toward the company determine the market value that investors pay for ordinary shares. A famous example of this is Berkshire Hathaway Inc. (BRK.A), whose Class A Common Shares have a par value of $5 but trade above $300,000 on the New York Stock Exchange (NYSE) as of May 2019.
Real World Example of Ordinary Shares
Apple Inc. (AAPL) has 4,715,280,000 ordinary shares on issue that pay a 1.62% annual dividend yield, according to Nasdaq.com. Let’s assume an institutional investor owns 300 million ordinary shares in the tech giant. This means they have 6.4% ownership of the company (300,000,000 / 4,715,280,000) and receive an annual dividend payment of $918,540,000 ($56,700,000,000 x 1.62%) The ordinary shares also give the investor a 6.4% weighted vote on matters put before shareholders of the company, as one share equals one vote.