Loading the player...

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 of ownership in the company. All other shares of a company's stock are, by definition, preferred shares.

BREAKING DOWN 'Ordinary Shares'

Ordinary shares must be part of the stock of all corporations, 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.

RELATED TERMS
  1. Ordinary Income

    Ordinary income is composed mainly of wages, salaries, commissions ...
  2. Golden Share

    A type of share that gives its shareholder veto power over changes ...
  3. Preference Shares

    Preference shares are company stock with dividends that are paid ...
  4. Shares

    Shares are a unit of ownership of a company that may be purchased ...
  5. Stock

    A stock is a form of security that indicates the holder has a ...
  6. Ordinary Annuity

    An ordinary annuity is a series of equal payments made at the ...
Related Articles
  1. Investing

    Know your shareholder rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company. Read on to learn what rights you have as a shareholder.
  2. Financial Advisor

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  3. Financial Advisor

    Income tax on mutual funds: The basics

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  4. Investing

    Understanding Preferred Stocks

    Companies choose preferred stock for many reasons some being the flexibility of payments and easier to market. Learn the pros and cons of preferred stocks.
  5. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  6. Managing Wealth

    Issued share capital versus subscribed share capital

    Learn the difference between issued share capital versus subscribed share capital. Get information about various types of capital.
  7. Taxes

    Carried Interest: A Loophole in America’s Tax Code

    With income inequality becoming an increasingly apparent problem in the U.S., it is time to start removing tax loopholes like carried interest.
  8. Taxes

    How are Qualified and Nonqualified Dividends Taxed?

    Dividends are taxed differently based on if they are qualified or nonqualified.
  9. Investing

    Preferred Stocks vs Bonds: Which is Best?

    What is the difference between corporate bonds and preferred stocks? Understand the similarities, differences and which to pick for your portfolio.
  10. Investing

    7 Tips for Tax-Managed Investing

    Use these seven tips to reduce the tax impact on your taxable portfolio.
RELATED FAQS
  1. If I reinvest my dividends, are they still taxable?

    If you reinvest your dividends, you still pay taxes as though you received the cash. Stock dividends are generally not taxable ... Read Answer >>
  2. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
  3. Why would a company issue preference shares instead of common shares?

    Learn about some reasons that corporations might issue preference or preferred shares, and why investors might value them ... Read Answer >>
Trading Center