What it means
Ordinary shares are the most common type of stock issued by companies. When a business needs to raise money without taking on debt, it sells these shares to investors.
As a shareholder, your financial return usually comes in two forms: dividends, which are payouts from company profits, and capital growth, which happens when the value of your shares increases over time. Ownership through ordinary shares also grants you voting rights at annual general meetings.
Typically, one share equals one vote. This means that ordinary shareholders have a direct say in choosing the board of directors and shaping the strategic direction of the company.
However, this ownership comes with risk. If the business fails, ordinary shareholders are last in line to get their money back after creditors, bondholders, and preferred shareholders are paid.
For managers, understanding ordinary shares is vital because they form the baseline of equity finance. Issuing more shares dilutes the ownership percentage of existing shareholders, which requires careful management.
It also sets expectations for profitability, as investors buying these shares expect the company to grow and generate strong returns over the long term. Think of an ordinary share like owning a single brick in a large apartment building.
You own a tiny piece of the whole structure, you get a cut of the rental income, and you help vote on building repairs.
In practice
Real-world examples
Example 1
TechStart Ltd issued 10,000 ordinary shares to fund its initial software development. Sarah bought 1,000 shares, giving her a 10% ownership stake and a voice in major company decisions. If the company later pays a dividend, she receives exactly 10% of the total.
Example 2
Baker Street Bakery needed capital for a second location. The owner converted the sole trader business into a limited company, holding 80 ordinary shares and selling 20 to a local investor. If the investor paid $40,000 for that 20% stake, the deal values the whole company at 40,000 / 0.20 = $200,000.
Example 3
GreenEnergy plc has millions of ordinary shares traded publicly on the stock exchange. Pension funds buy these shares to secure steady dividend income for their retirement members. Because the shares are traded daily, any investor can see the market price and sell when they choose.
Think of it
Think of an ordinary share like owning a single brick in a large apartment building. You own a tiny piece of the whole structure, you get a cut of the rental income, and you help vote on building repairs.
Formula
Calculation
Earnings Per Share (EPS) = Net Income / Total Number of Ordinary Shares in Issue.
Worked example: a company makes $50,000 in net profit and has 10,000 ordinary shares in issue, so EPS = 50,000 / 10,000 = $5 per share.
Ownership and dividends follow the same logic. If the board declares a dividend of $2 per share, the total paid out is 10,000 x 2 = $20,000, which is 20,000 / 50,000 = 40% of the profit. A shareholder holding 1,000 of the 10,000 shares owns 1,000 / 10,000 = 10% of the company and receives 1,000 x 2 = $2,000 of that dividend.Case study
Seen in the real world
This is a fictional, illustrative scenario. Oakwood Design, a bespoke furniture maker, wanted to expand its workshop but lacked the cash. The two founders, who each held 10,000 of the 20,000 ordinary shares in issue, decided to issue 5,000 new ordinary shares at $10 each, raising $50,000 from local investors. After the share issue, the total number of shares grew from 20,000 to 25,000. The founders' combined ownership dropped from 100% to 20,000 / 25,000 = 80%, so each founder now held 40%.
In return for their $50,000 investment, the new shareholders received a 20% stake in Oakwood Design, along with voting rights and eligibility for future dividends. Over the next two years, the workshop expansion doubled the company's profits. Oakwood Design paid its first dividend of $2 per share, so the new investors received 5,000 x 2 = $10,000 in total, while each founder received 10,000 x 2 = $20,000. The founders owned a smaller slice, but at the $10 issue price their 20,000 shares were worth $200,000 of a $250,000 company, which shows how ordinary shares align the interests of the business and its financial backers.
Watch out
Common mistakes
- Assuming ordinary shares guarantee a regular income, forgetting that dividends are never guaranteed.
- Believing that owning a majority of shares is the same as managing daily operations, ignoring the role of directors.
- Forgetting that issuing new shares reduces the ownership percentage of current shareholders.
Questions
People also ask
What is the difference between ordinary shares and preference shares?
Ordinary shares carry voting rights and variable dividends based on performance. Preference shares usually do not have voting rights, but they get paid dividends first and have priority if the company liquidates.
Can ordinary shareholders lose more money than they invested?
No. Ordinary shares feature limited liability, meaning your maximum loss is strictly limited to the amount you paid for the shares.
Do all ordinary shares have the same voting rights?
Usually yes, but some companies issue different classes of ordinary shares, such as 'A' shares and 'B' shares, where one class might carry more voting power than the other.