WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Accounting Tutorials » Shareholders Equity Tutorials » Ordinary Shares

Ordinary Shares

By Madhuri ThakurMadhuri Thakur | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

Ordinary Shares Definition

Ordinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working, carries voting rights and is shown under owner’s equity in the liability side of the balance sheet of the company.

It is also called common shares and represents the equity ownership in a company proportionate to the number of ordinary shares with each investor. It does not have a pre-determined dividend, i.e., the shareholders of such shares do not receive a mandatory dividend.

It is up to the Company to pay the dividend if it seems prudent, looking at the financial health of the Company. Each ordinary share represents a vote in the Company which can be used during the Annual General Meeting and other general meetings of the Company for the appointment of Directors, passing of different shareholders resolutions.

Ordinary Shares

Example – Let’s say an investor holds 10,000 shares in a Company TNG Inc., which has 5,00,000 shares outstanding. Thus, he will have 10000/500000 = 2% ownership in the Company.

Change in Ordinary Shares

Several ordinary shares outstanding with the Company can change over time if the Company chooses to take a corporate action. These corporate actions could be:

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

#1 – Stock Split

In the case of a stock split, the shares of the Company are broken in some proportion like 1:2, which means every shareholder having a single share will now have 2 shares.

Stock Split 3 for 2

#2 – Reverse Stock Split

In reverse stock splits, 2 or more shares are joined together to form a single share. Issuing more shares, the Company requires to raise capital can issue several shares in the market.

Reverse Stock Split

source: genomeweb.com

#3 – Buyback

If the Company has enough cash and does not have resources to deploy, the capital can buy back the shares from the shareholders at the prevalent market price, thereby reducing the number of ordinary shares.

Fixed Price Share Repurchase Buyback

#4 – Bonus Shares

The Company can issue bonus shares to the shareholders, which can be considered as a stock dividend.

Bonus Shares

source: business-standard.com

The investors, while analyzing the number of outstanding shares and the change in the number over some time, should look for such corporate actions taken by the Company.

Pros

  • It has the right to vote. Hence, the investors can elect the board Directors, take decisions on the Company’s affairs
  • If the shares are traded on public exchanges, the shareholders can buy/sell the shares in the market with ease
  • There are no obligations of the ordinary shareholders
  • The ordinary shareholders benefit from capital gains and dividend provided by the Company
  • For businesses issuing ordinary shares is a crucial way of raising capital. This helps the Company to expand its business without increasing too much debt. High debt could be risky for the business as the debt holders are to pay back. However, the holders of common shares are not required to be paid back. However, the Company can share the profit with them in kind of dividend
  • A number of outstanding shares are flexible as the Company can decide how many ordinary shared it wants to be floated in the market based on the needs. It can issue new ordinary shares, buy back some from the investors, split them, issue bonus shares, etc.

Cons

  • Due to volatility in share prices, i.e., the prices of ordinary shares, the shareholders can lose money.
  • Companies can go bankrupt due to internal fraud or taking risky bets in business; thus, shareholders can lose the entire capital.
  • There is no pre-defined dividend. Some times it may take years for the ordinary shareholders to gain significantly from holding the ordinary shares of the Company.
  • In case of liquidation of the Company, ordinary shareholders receive the residual amount left after paying the creditors.
  • An equity investor owns a very small proportion of the Company. Thus there is hardly any impact on the decision of the Company using voting rights.

Limitations

  • There is limited control of the Company and in decision making.
  • There is a limitation to whether the dividend is received or not.
  • The price of it can be dependent on both the Company’s performance and external factors.

Conclusion

Ordinary Shares is the equity share capital of the Company which the Company issues to raise capital. They do not have a pre-defined dividend. It gives ownership of the Company to shareholders and assigns the right to vote in the matters of the Company with 1 ordinary share having 1 vote each.

Recommended Articles

This has been a guide to Ordinary Shares and its definition. Here we discuss the top 4 reasons to changes in ordinary shares along with advantages, disadvantages, and limitations. You can learn more about financing from the following articles –

  • Floating Stock
  • Shares Issued
  • Shares Vesting
  • Class A Shares
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Download Coursera IPO Financial Model

By continuing above step, you agree to our Terms of Use and Privacy Policy.
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

Coursera IPO Financial Model & Valuation Free Download