Five Important Features of Ordinary Shares

Successful investment in the stock market requires a solid understanding of the various characteristics and features of shares. Before making any investment decisions, it is crucial to grasp some fundamental concepts, such as the nature of ordinary shares, the different types of shares available, the factors that influence share price fluctuations, and more.

At a basic level, shares can be categorized into two main types: ordinary shares and preference shares. In this essay, we will focus on the features and rights associated with holding ordinary shares, also known as equity shares or common stock.

Ordinary shares are the most common type of shares that investors encounter in the financial markets. They represent a certificate of ownership in a company, granting shareholders a stake in its assets and profits.

Below are the five key features associated with ordinary shares:

1. Limited Liability

One of the primary benefits of owning ordinary shares is the concept of limited liability. Shareholders’ financial liability is restricted to the amount they have invested in the shares. In the event of the company’s bankruptcy, ordinary shareholders cannot be forced to pay beyond their investment. This protection ensures that investors are shielded from personal financial losses beyond the value of their shares.

2. Liquidation Rights

In the unfortunate event of a company’s liquidation, ordinary shareholders are entitled to a portion of the proceeds from the sale of the company’s assets. However, it is important to note that ordinary shareholders are last in line to receive payment. Creditors, bondholders, and preference shareholders are paid first, with ordinary shareholders receiving any remaining funds only after these obligations have been satisfied.

3. Preemptive Rights

Ordinary shareholders are granted preemptive rights, which allow them the first opportunity to subscribe to new shares if the company decides to issue additional stock. These rights enable existing shareholders to maintain their proportional ownership in the company, often at a discounted price, before the new shares are made available to the public. This feature protects shareholders from dilution of their ownership stake.

4. Voting Rights

Ordinary shareholders possess voting rights, allowing them to participate in the governance of the company. Typically, each ordinary share carries one vote, which can be exercised during the company’s annual general meetings (AGMs) or special meetings. Shareholders can use their votes to elect members to the board of directors, who in turn oversee key decisions, such as executive appointments and corporate policies.

5. Dividend Payments

Ordinary shareholders have the right to receive a share of the company’s profits in the form of dividends. However, unlike preference shares, the amount and frequency of dividend payments are not fixed. Dividends are typically declared by the company’s board of directors and can fluctuate depending on the company’s profitability. While dividends can provide a source of income, they are not guaranteed, and shareholders may not receive any payouts if the company chooses to reinvest profits back into the business.