Ordinary Shares: Definition, Features & Example

Understand

Ordinary shares (also known as common shares) are used to represent ownership of shareholders in a company. For example, if you have purchased 20 shares out of 100 shares of ABC Company, this means that you own 20% stocks of the company or you own the company 20%.

Why invest in ordinary shares?

By holding common shares of a particular company, shareholders may get the return on their investment in the shape of dividend and capital gain. Continuing above example, suppose, you purchased the 20 stocks of the ABC Company for $160 ($8 per share). During the year, the company paid the dividend of $0.15 per share and the market value per share has been increased to $10. So the benefits of investing in the ordinary shares are:

Total wealth invested = $160

Dividend received during the year $0.15 per share = $0.15*20 = $3

Capital gain per share = $10 (Current price per share) – $8 (Purchased price per share) = $2

Total wealth at the year-end = Current investment + Dividend + Capital Gain = $160 + ($3*20) + ($2*20) = $260

Gain in total wealth = $260 – $160 = $100

Features of Ordinary Shares

Ordinary shareholders are entitled to receive the dividend on residual profit; which is left behind after dividend payment to preferred shareholders.

Ordinary shares are considered riskier than preferred shares because preferred shares are considered first while payment in the time of liquidation or dividend payment. Due to the high risk, return on ordinary shares is greater than preferred shares.

Next: Difference between Common and Preferred Stocks

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