Ordinary share – definition and meaning
An ordinary share is a form of corporate equity ownership, i.e., a type of company share. We also call it a voting share. The United Kingdom and Commonwealth countries use the term ‘ordinary share,’ while the United States uses the term ‘common stock.’ It is the most common form of share that investors buy and sell in stock markets.
An ordinary share gives the owner the right to receive dividends and to vote at AGMs. AGM stands for Annual General Meeting. Ordinary shareholders receive dividends after preference shareholders have received theirs.
Ordinary shares serve as evidence of proportionate ownership of a company. In other words, they are proof of ownership of part of a company.
For example, if XYZ PLC issued 10,000 shares and you own 500 ordinary shares, you own 5% of the company.
Every PLC must have ordinary shares as part of its stock. PLC stands for Public Limited Company.
In the UK and many other countries, the company must issue at least one ordinary share to a shareholder. Put simply; the law states that somebody must be the owner of the company.
In a Legal Vision article, Jill McKnight says the following regarding ordinary shares:
“An ordinary share gives the shareholder the right to vote on matters put before all of the shareholders of the company. The weight of a particular shareholder’s vote will usually depend on the ownership percentage that they have in the company.”
“Typically, one share equals one vote. An ordinary share also provides the shareholder with the right to receive a share of the company’s profits by way of dividends.”
Preference vs. ordinary share
What is the difference between a preference share and an ordinary share?
We can also call them preferred stock or preferred share. As the name indicates, preference shares give their owners preferred treatment.
Owners usually receive fixed dividend payments and have priority over ordinary shareholders. In other words, preference shareholders receive their dividends first. What is left over goes to ordinary shareholders.
If a company becomes insolvent, preference shareholders are further up in the queue for repayment. Preference shareholders have a liquidation preference over ordinary shareholders.
Companies often pay a fixed percentage dividend to preference shareholders. This gives investors more certainty over their investment.
When considering investing in startups, investors prefer purchasing preference shares. They prefer this because startups have a higher risk of going bankrupt than established companies.
Also, a startup is unlikely to register profits during its first couple of years. Therefore, there will probably be no dividends for ordinary shareholders during the first two years.
If you own an ordinary share, you can vote at AGMs. Shareholders get one vote per share. Preference shareholders do not vote.
Ordinary shareholders receive dividends as a percentage of profits. However, they only get their dividends after the company has paid its preference shareholders. If there is no money left over, ordinary shareholders get no dividends that year.
In fact, whether or not to pay dividends to ordinary shareholders is at the company’s discretion. Even if there are profits, it may decide to spend that money on new equipment or expanding overseas.
The dividends on ordinary shares fluctuate, unlike those of preference shares.
Video – Ordinary shares
In this McGraw Hill Education video, David Hillier explains what an ordinary share is. Prof. Hillier works at the University of Strathclyde in Scotland. He is Associate Principal and Executive Dean of Strathclyde Business School.