Understanding Ordinary Shares

Ordinary shares, also known as common shares or equity shares, represent a form of ownership in a company. When an investor holds ordinary shares, they essentially become a part-owner of the business with the potential to benefit from its profits and growth, while also bearing the risks associated with its performance. Ordinary shareholders also enjoy voting rights, allowing them to influence important corporate decisions.

This article explores what ordinary shares are, their unique features, benefits, risks, and how they compare with preference shares. It will also explain how companies issue these shares and why they are a cornerstone of equity markets.

Ordinary shares are the most widely issued type of shares by companies to raise equity capital. Buying an ordinary share means that an investor acquires a fractional ownership stake in the company. This ownership entitles them to a portion of profits, generally in the form of dividends, and potential capital appreciation if the company grows over time.

Ordinary shareholders participate in both the rewards and risks of the business. They have a residual claim on assets, which means that in the event of liquidation, they are paid after all debts and preference shareholders are settled. Despite the higher risk, they enjoy greater upside potential through price appreciation and dividend growth compared to fixed-income securities.

By examining these features, investors can better understand how ordinary shares function within a company’s capital structure.

Ownership Rights

Holding ordinary shares means owning a part of the company proportional to the number of shares owned. This ownership allows investors to benefit from future growth and profitability.

Voting Rights

Ordinary shareholders usually have the right to vote at annual general meetings (AGMs) on matters such as electing the board of directors and approving financial statements.

Dividend Payments

Dividends for ordinary shares are not fixed and depend on the company’s profitability and dividend policy. Dividends may vary or be skipped if the company faces losses.

Capital Appreciation

Shareholders benefit from potential increases in share price, providing capital gains when they sell shares at a higher price than purchase.

Risk Exposure

Ordinary shareholders are last in line during liquidation, receiving payouts only after creditors and preference shareholders.

Recognising these benefits helps investors understand why ordinary shares remain a popular choice for building long-term wealth.

• Potential for High Returns: Capital appreciation and dividend income can provide attractive returns over time.
  

• Voting Power: Shareholders can influence company decisions and governance.
  

• Liquidity: Ordinary shares of listed companies can be bought and sold easily on stock exchanges.
  

• Ownership and Control: Shareholders have a stake in company success and future growth.

Ordinary and preference shares serve different purposes for both companies and investors.

Companies issue ordinary shares during initial public offerings (IPOs), follow-on public offerings (FPOs), or private placements to raise equity capital. Shareholders can buy these shares through stock exchanges or other market platforms.

While ordinary shares provide growth opportunities, they also carry inherent risks that investors must consider.

• Market Volatility: Share prices can fluctuate widely due to market and economic conditions.
  

• Dividend Uncertainty: Dividends are not guaranteed and may be reduced or omitted.
  

• Residual Claims: Ordinary shareholders have the lowest priority in bankruptcy or liquidation.
  

• Dilution: Issuance of new shares can dilute ownership percentage.

Ordinary shares provide investors with ownership rights, voting power, and potential for capital gains and dividends. However, they come with risks including price volatility and lower claim priority. Understanding these factors helps investors make informed decisions about their equity investments.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.