What are ordinary shares?
Ordinary shares (also called common shares or common stock) represent fractional ownership in a corporation. Holders of ordinary shares share in the company’s gains and losses, typically have voting rights at shareholder meetings, and may receive dividends if the board declares them. Ordinary shareholders are last in line to be paid if a company is liquidated—after secured creditors, bondholders and preferred shareholders—so they carry greater risk but also greater upside potential if the business succeeds and its stock appreciates [Investopedia; SEC].
Key takeaways
– Ordinary shares equal ownership in a company and usually carry voting rights.
– Dividends on ordinary shares are discretionary (not guaranteed) and decided by the board.
– Ordinary shareholders have residual claim on assets and earnings after senior obligations are met.
– Ordinary shares tend to be more volatile than preferred stock or bonds but offer higher upside potential.
– Market price reflects investor expectations; intrinsic value can be estimated with financial metrics and valuation models.
How ordinary shares work
– Ownership and voting: Each share represents a proportional ownership stake. Common shareholders typically vote on boards, mergers, and major corporate matters; some companies have multiple share classes with different voting rights.
– Dividends: If declared, dividends are paid from earnings or retained earnings. Preferred shareholders (if any) receive their fixed dividends before common shareholders.
– Capital gains (or losses): Share price changes based on company performance, macro conditions and investor sentiment; shareholders realize gains by selling shares.
– Liquidation hierarchy: In insolvency, ordinary shareholders receive any remaining assets only after all debts and preferred claims are satisfied. This is why common equity carries more risk than debt or preferred equity.
Rights of ordinary shareholders
– Voting rights (elect directors, approve major transactions) — subject to class structure.
– Right to receive dividends if declared.
– Right to inspect corporate records and receive annual financial statements.
– Right to a proportionate share of remaining assets on liquidation (after creditors and preferred).
Note: Some preferred shares may have limited voting rights, but preferred holders usually receive dividend priority [Investopedia].
Advantages of holding ordinary shares
– Upside potential: No cap on returns from price appreciation if the company grows.
– Influence: Ability to vote on governance matters (more relevant for meaningful holdings or shareholder activists).
– Dividend upside: Potential to receive dividends that may grow over time if earnings increase.
– Liquidity: Shares of public companies can typically be bought and sold easily through exchanges.
– Capital allocation benefit: In major corporate events (e.g., sale, merger), ordinary shareholders can share in significant upside after obligations are met.
Risks & disadvantages
– Last in priority for payouts in liquidation.
– Dividends are not guaranteed and can be reduced or suspended.
– Price volatility — equity values can swing widely.
– Dilution risk when companies issue more shares.
– Potential loss of voting power if the company has multiple share classes.
How the value of ordinary shares is determined
Market price reflects supply and demand and investor expectations. Fundamental approaches to estimating intrinsic value include:
– Price-to-earnings (P/E) ratio: P/E = market price / earnings per share (EPS). Used for quick relative valuation.
– Dividend metrics: Dividend yield = annual dividend per share / price. For dividend-paying firms, the dividend discount model (DDM) can estimate fair value for stable payers.
– Discounted cash flow (DCF): Projects future cash flows and discounts them to present value — a more comprehensive intrinsic-value method.
– Book value and tangible book: Useful for asset-heavy firms (book value per share = equity / shares outstanding).
– Comparable-company analysis: Compare multiples (P/E, EV/EBITDA) to peers.
Market prices also reflect macro conditions, investor sentiment, growth expectations, and liquidity. Par value is mostly symbolic and usually unrelated to market price.
Practical steps for investors
Before you buy
1. Define your objective and risk tolerance: Are you seeking growth, income (dividends), or a mix? How long is your time horizon?
2. Do company-level analysis:
– Read the latest annual (10-K) and quarterly (10-Q) reports.
– Check revenue, profit margins, cash flow, debt levels and trends.
– Review management discussion & risks.
3. Evaluate valuation and fundamentals:
– Compute P/E, P/S (price-to-sales), EV/EBITDA, dividend yield, and compare to industry peers.
– If dividend income matters, confirm dividend history and payout ratio (dividend / net income). A sustainable payout ratio is generally lower than 100%; many investors prefer >25–60%, depending on industry.
4. Consider corporate structure: Check for multiple share classes or concentrated insider ownership that can reduce voting influence.
5. Assess competitive position and catalysts: Market share, moat, regulatory risks, growth opportunities, or upcoming events (product launches, earnings).
How to buy and set positions
1. Choose a brokerage: Look at fees, execution, research tools and tax reporting.
2. Decide order type and size: Use limit orders if price control matters; consider position-sizing rules (e.g., no single stock should be an outsized % of your portfolio).
3. Stagger purchases: Dollar-cost averaging can reduce timing risk for volatile stocks.
Monitoring and management
1. Track fundamentals, earnings releases and guidance revisions.
2. Reassess your investment thesis regularly — sell if the fundamental case deteriorates.
3. Rebalance portfolio periodically to maintain target risk allocation.
Voting and shareholder engagement
– Vote your shares on proxy items or use proxy advisory recommendations. For meaningful holdings, consider engaging with management on governance matters.
Tax considerations
– Capital gains tax: Short-term vs long-term rates differ by jurisdiction (e.g., longer holding periods often taxed at lower rates).
– Dividends: Qualified vs non-qualified dividends may be taxed differently. Keep records of purchase dates and dividend receipts. Consult a tax advisor for specifics in your country.
Selling ordinary shares
– Decide on target price or exit criteria (valuation, deterioration in business, better opportunities).
– Consider tax consequences and transaction costs.
– Use limit orders if you want price certainty; market orders for immediate execution.
Example formulas
– Dividend yield = (Annual dividends per share) / (Current share price)
– P/E = (Market price per share) / (Earnings per share)
The bottom line
Ordinary shares are the most common form of equity ownership with voting rights and potential for capital appreciation and dividends. They carry more risk than debt and preferred shares because dividends aren’t guaranteed and shareholders sit last in liquidation. Investors can use a mix of fundamental analysis, valuation metrics and portfolio risk-management steps to evaluate and hold ordinary shares consistent with their goals.
Sources and further reading
– Investopedia — Ordinary Shares (common stock): https://www.investopedia.com/terms/o/ordinaryshares.asp
– U.S. Securities and Exchange Commission — Stocks: https://www.sec.gov/fast-answers/answersstockshtm.html
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.