What Are Ordinary Shares?
Let me explain ordinary shares directly to you: these are also called common shares, and they represent a slice of ownership in a company, giving you voting rights at shareholder meetings. Unlike preferred shares, you aren't guaranteed dividends with ordinary shares, but you can still benefit when the company turns a profit. Most shares traded on U.S. stock exchanges fall into this category, offering you the chance for votes and potential rewards without the promise of steady payouts.
Key Takeaways
- As an ordinary shareholder, you get voting rights in company decisions but stand last in line for dividends and liquidation payouts.
- Dividends for your ordinary shares are set by the company's board and aren't guaranteed.
- You could gain more during profitable periods compared to preferred shareholders.
- Preferred shares come with fixed dividends and priority over ordinary shares in profit distribution.
- The market value of ordinary shares often far exceeds their par value due to investor demand.
How Do Ordinary Shares Work?
Think of an ordinary share as your fraction of ownership in the issuing corporation. As the owner, you get a say in major decisions through votes at shareholder meetings. You might receive a dividend, or you might not— that's up to the board of directors, who decide if and how much based on the company's profits from the past quarter or year.
Companies can also issue preferred shares, which act like a mix of stock and bond. Holders of these get a guaranteed dividend, and their share prices don't fluctuate as wildly as ordinary shares. If you're in preferred shares, you're mainly after that reliable income stream.
What Rights Do Ordinary Shareholders Have?
You, as an ordinary shareholder, can receive any leftover profits as dividends, but only after preferred shareholders get their cut. This might amount to nothing if the company chooses to reinvest everything instead of paying out. And if the company goes under, you can claim remaining value, but only after bondholders, preferred shareholders, and others are paid first.
Advantages of Holding Ordinary Shares
You take on more financial risk with ordinary shares than with preferred ones, but that risk can lead to bigger rewards. If the company hits a big profit, creditors and preferred shareholders get their fixed amounts, leaving the rest for you and other ordinary holders to split. This is especially true in cases like startup sales to bigger firms, where ordinary shareholders often come out ahead.
Beyond profits, you have the right to vote for board members and approve annual financial statements—some preferred shareholders get this too, but it's standard for ordinary ones.
How Is the Value of Ordinary Shares Determined?
Ordinary shares typically have a low par value—just a symbolic few cents. But their real market price comes from the company's overall value, what investors think of it, and broader market trends. Take Berkshire Hathaway's Class A shares, for instance: they have a $5 par value but traded above $325,000 each in early September 2020.
The Bottom Line
In summary, ordinary shares give you proportionate ownership and voting rights in a company, with dividends that aren't guaranteed but the potential for big gains if things go well. Compared to preferred shares, you're dealing with more volatility and risk, but that positions you for higher rewards. By understanding these dynamics, you can decide if ordinary shares fit your risk tolerance and investment approach.
