Ordinary Shares of Stock
Key takeaways
- Ordinary (common) shares represent fractional ownership in a company and typically carry voting rights.
- Dividends for ordinary shareholders are not guaranteed and are paid only after any preferred-share claims.
- Ordinary shareholders are last in line in liquidation, after creditors and preferred shareholders.
- Ordinary shares can offer higher upside in profitable companies but come with greater volatility and risk.
- Par value is usually symbolic; market value depends on company performance, investor sentiment, and market conditions.
What are ordinary shares?
Ordinary shares—also called common shares—grant owners a proportional ownership stake in a corporation. Holders usually have the right to vote on major corporate matters (such as electing the board of directors) and to receive financial reports. Unlike preferred shares, ordinary shares do not guarantee fixed dividends.
How ordinary shares work
- Ownership and voting: Each ordinary share represents a claim on ownership; voting rights let shareholders influence corporate governance and major decisions at shareholder meetings.
- Dividends: The board of directors decides whether to pay dividends and how much. Dividends to ordinary shareholders are discretionary and can vary or be omitted if the company reinvests earnings.
- Residual claims: Ordinary shareholders have a residual claim on assets and profits. They are paid after creditors and preferred shareholders in the event of liquidation.
Rights of ordinary shareholders
- Vote on corporate matters and elect board members (specific voting power depends on share class).
- Receive dividends if and when declared by the board.
- Claim remaining assets on liquidation only after higher-priority claims are satisfied.
Note: Some preferred shares carry voting rights, but typically preferred shareholders have priority for dividend payments and liquidation proceeds.
Advantages and risks
Advantages:
* Potential for significant capital appreciation if the company grows or is acquired.
* Participation in company upside above fixed obligations to creditors and preferred holders.
Risks:
* Greater exposure to company downturns—ordinary shareholders absorb losses after creditors and preferred holders.
* Dividend uncertainty—no guaranteed income stream.
* Higher price volatility compared with preferred shares or fixed-income securities.
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How value is determined
- Par (face) value: Often a nominal amount set when shares are issued; largely symbolic and unrelated to market price.
- Market value: Driven by company fundamentals (earnings, growth prospects), investor expectations, supply and demand, and broader market conditions. Market prices can far exceed par value.
Comparison with preferred shares
- Preferred shares usually pay fixed dividends and have priority over ordinary shares for dividends and liquidation.
- Ordinary shares typically offer voting rights and greater potential for capital gains, but with more volatility and lower priority in claims.
Bottom line
Ordinary shares offer proportional ownership and governance influence, along with the potential for higher returns if a company performs well. They carry more risk and uncertainty—particularly regarding dividends and liquidation priority—than preferred shares or debt. Investors should weigh their risk tolerance, income needs, and investment horizon when considering ordinary shares.