What it means
When you own ordinary shares, you are essentially a part-owner of the business. Unlike lenders, who are owed fixed repayments, ordinary shareholders take on more risk because their returns depend entirely on how well the company performs.
If the business makes a profit, the board of directors may distribute a portion of those earnings to shareholders as dividends. If the business grows, the value of the shares typically increases, allowing owners to sell them later for a profit.
These shares also grant voting rights, usually one vote per share. This allows owners to participate in major decisions, such as electing the board of directors or approving significant corporate transactions.
However, this ownership also carries risk. If the company runs into financial trouble and goes into liquidation, ordinary shareholders are at the back of the queue.
Creditors, bondholders, and preferred shareholders must be paid first before ordinary shareholders see any remaining funds. For managers, understanding ordinary shares is vital when considering how to fund business growth.
Issuing new shares brings in cash without creating debt, but it dilutes the ownership percentage of existing shareholders. Balancing this dilution against the capital raised is a key strategic decision for leadership teams.
In practice
Real-world examples.
Example
TechStart UK issued 10,000 ordinary shares when founding the company. The two founders held 4,000 shares each, and an angel investor bought the remaining 2,000 shares for 20,000 pounds, valuing the startup at 100,000 pounds.
Example
Baker Street Bakery needed funds for a second oven. They issued 500 new ordinary shares to their head baker. This gave the baker a 10 percent stake in the business and aligned their daily efforts with the profitability of the shop.
Example
Global Shipping PLC has millions of ordinary shares traded publicly on the stock exchange. Everyday retail investors can buy a few shares through a brokerage account, becoming partial owners entitled to a share of annual dividends.
Think of it
“Owning ordinary shares is like owning a slice of a pie shop. You get a direct share of the profits when the shop does well, a vote on the recipes, and the risk that if the shop burns down, you only get paid out after the bank and suppliers are settled.
Formula
Calculation
Earnings Per Share (EPS) = (Net Income - Preferred Dividends) / Number of Ordinary Shares
Example: If a company makes 100,000 pounds in net profit, pays 10,000 pounds in preferred dividends, and has 45,000 ordinary shares, the EPS is (100,000 - 10,000) / 45,000 = 2.00 pounds per share.Case study
Seen in the real world.
GreenLeaf Logistics started as a small delivery service owned entirely by its two founders through 1,000 ordinary shares. As the business expanded across the UK, the founders needed 200,000 pounds for new electric vans. Instead of taking on a bank loan, they decided to issue 250 new ordinary shares to a venture capital firm.
Before the issuance, each founder held 50 percent of the company. After issuing the new shares, the total number increased to 1,250. The founders each now held 40 percent, while the venture capital firm held 20 percent. This capital injection allowed GreenLeaf to scale its operations quickly. Within two years, increased efficiency grew the company net profit to 150,000 pounds. The business declared a dividend of 50 pounds per share. The founders each received 25,000 pounds, and the venture capital firm received 12,500 pounds, proving that ordinary shares align investor returns with business growth.
Watch out
Common mistakes.
- Assuming ordinary shareholders are guaranteed to receive regular dividend payments.
- Forgetting that issuing new shares dilutes the ownership percentage of existing shareholders.
- Confusing ordinary shares with debt, which must be repaid regardless of company performance.
Questions
People also ask.
Do ordinary shareholders always have voting rights?
Usually yes, but some companies issue non-voting ordinary shares to keep control concentrated among founders while still raising capital.
Are ordinary shares the same as preference shares?
No. Preference shareholders get paid dividends first and have priority if the company liquidates, but they typically do not have voting rights.
Can ordinary shareholders lose more money than they invested?
No. Ordinary shares feature limited liability, meaning the maximum loss is the amount originally paid to buy the shares.
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