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 sharesCommon SharesCommon stocks are the number of shares of a company and are found in the balance sheet. It is calculated by subtracting retained earnings from total equity.read more 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.
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For eg:
Source: Ordinary Shares (wallstreetmojo.com)
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:
#1 – Stock Split
In the case of a stock splitStock SplitStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly.read more, 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.
#2 – Reverse Stock Split
In reverse stock splitsReverse Stock SplitsReverse stock split refers to the process of boosting a company’s stock price by reducing the number of its outstanding shares. It is attained by combining some of the existing shares in the market and simultaneously raising their value in the same ratio.read more, 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.
source: genomeweb.com
#3 – Buyback
If the Company has enough cash and does not have resources to deploy, the capital can buy back the sharesBuy Back The SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more from the shareholders at the prevalent market price, thereby reducing the number of ordinary shares.
#4 – Bonus Shares
The Company can issue bonus sharesBonus SharesBonus shares refer to the stocks issued by the companies for free of cost to their existing shareholders in the proportion of their stock holdings. Companies issue such shares to compensate the shareholders with a higher dividend payout in the form of stocks.read more to the shareholders, which can be considered as a stock dividend.
source: business-standard.com
The investors, while analyzing the number of outstanding sharesNumber Of Outstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more 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 shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more 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 CompanyLiquidation Of The CompanyLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more, ordinary shareholders receive the residual amount left after paying the creditors.
- An equity investorEquity InvestorAn equity investor is that person or entity who contributes a certain sum to public or private companies for a specific period to obtain financial gains in the form of capital appreciation, dividend payouts, stock value appraisal, etc.read more 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 capitalEquity Share CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more 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.
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