While the share market might be a hub of opportunities, it is essential that every new investor steps into it equipped with all the relevant information that he or she might need. To that end, one of the first concepts that every investor should be aware of are the most common types of shares found in the market – ordinary shares. Here’s what you need to know about what are ordinary shares, their types as well as the advantages they offer to the investor.
What are Ordinary Shares?
Let us first delve into the ordinary shares meaning, its definition as well as how it fits into the overall context of the stocks.
Ordinary shares are essentially the type of shares given out by a company, that represent a faction of ownership in that company. They are also known as common stock and indicate the degree of interest that a shareholder has in the company’s assets. During regular discussions of the stock market and stock ownership, it is ordinary shares that are most typically being referred to.
Ordinary shares are most commonly issued in the market as a means for a company to raise capital. As the holder of ordinary shares in a company, you are entitled to receive certain benefits such as the right to vote during the company’s major shareholder meetings. Holders of ordinary shares can also be eligible to receive dividend payments from the company. However, this is subject to the company’s performance as well as various other factors.
In that aspect, ordinary shares are distinct from ‘preferred shares’ whereby dividends are guaranteed to the shareholders. Having said that, ordinary shares have certain benefits that make them lucrative investment options, which we will discuss later.
Types of Ordinary Shares
As an investor in the stock market, you are certain to come across and possibly trade in various types of ordinary shares. While they are the most common types of shares found in the market, ordinary shares themselves can be categorised further based on their specific features. Here is a closer look at a few of them:
- Voting/Non-voting shares– These types of ordinary shares determine the degree to which the shareholder gets to vote on major decisions regarding a company’s policies. While voting shares offer such voting rights, non-voting shares mean ownership, but differential or no voting rights.
- Sweat equity shares– These are typically offered by companies as a means of compensation or incentive, to employees and senior executives.
- Right shares– Current shareholders in a company are offered the advantage of purchasing further shares in the company before these shares become open for trade in the market. These are known as right shares.
What are the Advantages of Ordinary Shares?
Now that we have explored ordinary shares meaning as well as the types of ordinary shares, let us take a closer look at why these shares are beneficial for the average investor. After all, if they are so common in the stock market, what are advantages of ordinary shares that might prove useful to you?
To start with, it is helpful to note that investors in the stock market typically do not look to ordinary shares as their primary source of income. As mentioned earlier, unlike preferred shares, holders of ordinary shares are not guaranteed dividends. Instead, ordinary shares hold value because they undergo price changes with the changing market conditions. Also, ordinary shares are transferable, which means that when a holder of ordinary shares spots the right opportunity, he or she can sell them off and keep the profit.
Moreover, ordinary shares offer a degree of ownership in the company, allowing shareholders to weigh in on important company decisions, which is not the case with preferred shares. This stake in the company also means that while ordinary shares mean greater financial risk for the shareholder, they can also lead to greater financial rewards when the company performs well.
Ordinary shares are prevalent in the stock market, and with the right amount of insight, can make for a prudent investment for the right investor. With their features of ownership and potential for rewards, the benefits of ordinary shares depend largely on the company’s performance and policies. As is always the case, it is recommended to make a well-researched decision before investing in ordinary shares or other assets in the stock market.