What it means
An ordinary share represents a proportional stake in a company. Owning 5,000 of a company's 100,000 ordinary shares means owning 5% of the residual value of the business, along with 5% of the votes on matters put to shareholders.
The word "ordinary" signals the absence of special privileges rather than anything second-rate. Preference shares may have a fixed dividend and rank ahead on a winding-up, and founder shares may carry extra votes, but ordinary shares simply take what is left once lenders and preferential holders have been satisfied.
That last-in-the-queue position is exactly why ordinary shares are the growth instrument in most capital structures. If a company doubles in value, the fixed claims of lenders and preference holders do not double with it, so almost all of the increase accrues to the ordinary shareholders.
In everyday business use, ordinary shares are what employees receive when they exercise options, what investors buy in a listed company, and what the earnings per share figure in the annual report is calculated against. Dividends on them are discretionary, so a board can pay nothing in a hard year without breaching any obligation.
The main nuance is that not all ordinary shares are identical. Many private companies create alphabet shares, such as A ordinary and B ordinary, so that different shareholder groups can receive different dividend amounts or different voting rights while still sitting in the ordinary class.
In practice
Real-world examples
Example 1
A family engineering firm issues A ordinary shares to the three siblings running the business and B ordinary shares to two cousins who are not involved. Both classes share in growth, but only the A shares carry voting rights, so day-to-day control stays with the people doing the work.
Example 2
An employee at a listed retailer exercises options over 2,000 ordinary shares at $4.50 when the market price is $11.00, giving an immediate paper gain of 2,000 x ($11.00 - $4.50) = $13,000. She now votes at the annual meeting like any other ordinary shareholder.
Example 3
A brewery in financial difficulty sells its assets and repays the bank in full and the preference shareholders in part. The ordinary shareholders receive nothing, illustrating that the residual claim can be worth zero as easily as it can be worth a fortune.
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 ordinary share = (profit after tax - preference dividends) / number of ordinary shares
Residual value per ordinary share = (total assets - total liabilities - preference capital) / number of ordinary shares
A manufacturing company reports profit after tax of $4,200,000 and pays $200,000 of preference dividends. It has 5,000,000 ordinary shares in issue. Earnings per ordinary share = ($4,200,000 - $200,000) / 5,000,000 = $4,000,000 / 5,000,000 = $0.80.
Now suppose the same business is wound up. Its assets realise $30,000,000, it owes lenders and trade creditors $18,000,000, and preference shareholders are entitled to $4,000,000 of capital before the ordinary holders receive anything. The residual left for ordinary shares is $30,000,000 - $18,000,000 - $4,000,000 = $8,000,000, which is $8,000,000 / 5,000,000 = $1.60 per ordinary share.Case study
Seen in the real world
Penhallow Ceramics is a fictional business created for this illustrative example. Its founder held 600,000 ordinary shares and, needing $2,000,000 to expand, took investment from a fund that insisted on preference shares carrying a guaranteed return before any ordinary distribution.
Three years later the company was sold for $9,000,000. The preference holders took their $2,000,000 back plus an agreed $600,000 return, leaving $9,000,000 - $2,600,000 = $6,400,000 for the ordinary shares. With 800,000 ordinary shares in issue, that worked out at $8.00 each, and the founder's 600,000 shares were worth $4,800,000.
Had the sale price been only $3,000,000, the preference claim of $2,600,000 would have absorbed most of the proceeds and the ordinary shareholders would have shared just $400,000, or $0.50 a share. This invented example shows the two faces of ordinary shares: they magnify a good outcome and absorb a bad one.
Watch out
Common mistakes
- Assuming ordinary shares guarantee a dividend, when payments are entirely at the board's discretion and can be skipped in any year.
- Reading a percentage shareholding from the issued share count while ignoring options and convertible instruments that will dilute it later.
- Treating all ordinary shares as one class, when alphabet shares within the ordinary class can have very different dividend and voting rights.
Questions
People also ask
Are ordinary shares the same as common stock?
Yes, they are the same instrument under different names, with "ordinary shares" used in the UK and much of the Commonwealth and "common stock" in the United States.
What happens to ordinary shareholders if the company fails?
They rank last, so they are paid only after lenders, trade creditors and preference shareholders, and very often receive nothing at all.
Do ordinary shares always carry one vote each?
Not necessarily, since companies can create ordinary share classes with multiple votes, one vote or no votes, provided the articles of association allow it.