Definition
Ordinary shares of stock, also known as common shares or common stock, represent ownership in a corporation. They give shareholders voting rights, as well as a residual claim to a proportionate share of the company’s assets and earnings, should the company be liquidated. Unlike preferred stock, they carry no preferential rights to dividends or in the event of a company’s insolvency.
Phonetic
The phonetic pronunciation for the phrase “Ordinary Shares of Stock” is “ɔːrdɪnɛri ʃɛərz ʌv stɒk”.
Key Takeaways
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- Ordinary Shares of Stock represent ownership in a company and confer voting rights to the stockholder. They are also known as common shares and differ from preferred shares that may have priority for dividends and in bankruptcy.
- The value of Ordinary Shares can fluctuate significantly based on the company’s performance and market conditions. This makes them a higher risk investment compared to fixed income securities like bonds.
- Income from Ordinary Shares comes primarily from capital gains and dividends. However, not all companies pay dividends, especially those in growth or startup phase. Thus, holders of these stocks often rely on company growth to increase share price for a return on investment.
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Importance
Ordinary Shares of Stock, also known as Common Shares, play a vital role in business finance as they represent a portion of ownership in a company and can provide the shareholder with voting rights, often one vote per share. This gives shareholders the ability to influence the company’s direction through decisions on significant issues, such as the election of the board of directors. Furthermore, the holders of Ordinary Shares potentially benefit from the company’s profitability through dividends, which are a distribution of a portion of the company’s earnings, decided by the board of directors. However, it’s also important to note that if the company were to go bankrupt, owners of ordinary shares are lowest in the hierarchy to receive any remaining funds, only after creditors, bondholders, and preferred shareholders have been paid. Thus, ordinary shares carry both significant opportunities for growth and risk.
Explanation
Ordinary shares of stock, also known as common shares, play a key role in the corporate financial structure as they represent a form of ownership in a corporation. They give shareholders the right to participate in the company’s financial success through capital appreciation and dividends. The underlying purpose of ordinary shares of stock is to raise capital for the company. Companies issue shares in order to gather funds for various purposes such as expanding business operations, reducing debt, or financing new projects.In addition, holding ordinary shares offers the investor the ability to have a vote in shareholder meetings — affecting significant company decisions like electing the board of directors or endorsing proposed corporate policies. On the flip side, common shareholders stand last in line to claim any remaining assets in the event of a company’s liquidation, right after bondholders and preferred shareholders. Regardless, investing in ordinary shares allows shareholders to potentially benefit from a company’s growth and profitability in the long run.
Examples
1. Apple Inc. (AAPL): Apple Inc. offers ordinary shares of stock to the public, which give investors the right to participate in the company’s profits through dividends, though these dividends are not guaranteed and depend on the company’s performance. Ordinary shareholders of Apple also have voting rights at the company’s annual general meetings.2. Amazon.com Inc. (AMZN): Amazon also issues ordinary shares of stock. These shares represent ownership in Amazon and come with voting rights, though Amazon does not currently pay dividends.3. Tesla Inc. (TSLA): Tesla provides ordinary shares to investors, which represent a claim on part of the company’s assets and earnings. Like the aforementioned companies, holders of ordinary Tesla shares also have voting rights, allowing them to have a voice in corporate decisions.
Frequently Asked Questions(FAQ)
What are Ordinary Shares of Stock?
Ordinary Shares of Stock represent ownership in a company and a claim on part of the company’s profits and assets.
How are Ordinary Shares different from Preferred Shares?
Unlike Preferred Shares, which have a fixed dividend rate, Ordinary Shares may provide dividends that can vary in payout. Additionally, Ordinary Shareholders typically have voting rights in the company, while Preferred Shareholders do not.
What benefits do Ordinary Shares offer?
The main benefits of owning Ordinary Shares include the potential for capital growth if the company performs well and the right to vote on certain company decisions.
What risks are associated with investing in Ordinary Shares?
The risks include possible loss of investment if the company underperforms and the potential for low or no dividends during tough financial periods.
Do Ordinary Shareholders have a claim on assets if a company goes bankrupt?
Yes, but they are at the bottom of the priority ladder. This means that all other company debts and obligations must be paid before Ordinary Shareholders receive anything. This could result in receiving nothing if there’s not enough to cover these prior obligations.
Can Ordinary Shares of stock be sold or transferred?
Yes. Ordinary Shares can be bought or sold on the open market, assuming there’s a willing buyer and seller.
How are the prices of Ordinary Shares determined?
The price of Ordinary Shares typically depends on supply and demand in the market, the company’s financial performance, and investor sentiment.
Can Ordinary Shares be converted into Preferred Shares?
This depends on the specific policies of a company. Some companies may allow it, while others do not.
Related Finance Terms
- Dividends: This is a sum of money paid regularly by a company to its shareholders out of its profits or reserves.
- Voting Rights: These are the rights given to common shareholders in a company. Ordinary shareholders typically have the right to vote on company matters such as the election of directors.
- Capital Gain: This term refers to the rise in value of a capital asset (like ordinary shares) that gives it a higher worth than the purchase price. The gain, which is not realized until the asset is sold, is not taxed until it is sold.
- Equity: In terms of financial accounting, equity represents the residual interest in the assets of an entity after deducting liabilities. In simple terms, it is the value of an asset after all debts and liabilities have been settled. For ordinary shares, it refers to the proportion of the total share capital that they represent.
- Liquidation: This is a process whereby the assets of a company are brought together and subsequently used to repay creditors. The value of ordinary shares can be impacted significantly if a company goes into liquidation because ordinary shareholders are last in line to receive any remaining assets after all debts have been paid off.
