What Are Ordinary Shares ?
As the name suggests, ordinary shares are the most popular types of shares in the UK and other countries. They are widely traded on the world’s major stock exchanges and online trading platforms such as Monfex.com.
To get a better understanding of what are ordinary shares, you need to know which rights the shareholders have, specifically:
- To participate in and vote at the annual meeting of shareholders.
- To get dividends on the portion of the profit remaining after the interest is paid to holders of preferred shares.
- To receive information about the organization’s activities.
- To receive part of the property that will remain after all other requirements for the company are satisfied in the case of company liquidation.
Ordinary shares are securities that confirm participation in the equity of the company. In the hierarchy of rights, their owners have the lowest priority, giving way to creditors of the company (bondholders, banks, suppliers) and owners of preference shares.
The advantages of ordinary shares are the simple process of acquisition and alienation, a large selection of enterprises for investment, and a lot of information available about this type of stock and its features. At the same time, by investing in an ordinary share you put yourself at a big risk of losing your money, because the dividends are not guaranteed. Besides, ordinary shares highly depend on the management of the company that issues those stocks.
Types of Ordinary Shares
Ordinary shares typically fall into the following categories:
- The “A” class, which is issued most often only for founders, providing some advantages: more voting rights, high dividends, etc.
- The “B” class, which is available for purchase for a wide range of investors.
- The targeted shares, which are issued for a certain circle of potential investors for certain purposes. Such shares entitle the owners to some financial independence from the decisions of the main shareholders and actual owners of the company. The investor gets the benefits in the form of tax advantages and exemptions.
The shares typically vary in such parameters as stability, the amount of profit received, and the level of risk. According to these basic criteria, the most common are:
- "Blue chips", i.e. most stable and profitable ordinary shares. Their price is more or less stable, without excessive fluctuations, and dividend payments are regular, but they do not promise high profits. The cost of such investments is rather high.
- Profitable stocks - securities that bring a stable profit at a high percentage. Their cost in the market is low, but there are practically no guarantees of the long existence of the company in which you invested.
- Growth shares – securities that, according to experts, should grow in price in the near future.
- Cyclical stocks suggest constant sharp jumps in value depending on the situation on the exchange market.
- Speculative shares - often have high returns, but are considered the riskiest. Often this type of stock is typical for newly created business entities.
Learn more about the various types of stocks at Monfex.com.
Difference Between Ordinary and Preference Shares
The preference shareholder cannot vote at general meetings of shareholders but is the first one to receive dividends. Preference shares may impose restrictions on participation in management, and may also give additional management rights, but they have a number of advantages in comparison with ordinary ones. These advantages are the possibility of obtaining guaranteed income, the first allocation of profit for dividends, and the primary repayment of the value of shares in the case of company liquidation.
The disadvantages of owning preference shares are:
- Lack of preemptive rights to purchase shares of a new issue.
- The issuer has the right to withdraw the preference shares without explanation, while the investor will be paid compensation.
- No voting rights on company management.
- A fixed amount of dividends - it all depends on the specific type of preference shares. If the payment amount has been established for them, then in the case of making more profit, the dividends will increase.
What Are Ordinary Shares in a Company
Ordinary shareholders can take part in the management (one share gives one vote at a meeting of shareholders) and in the distribution of profit of the joint-stock company. The dividends are paid from the company's net profit. Their amount is defined by the board of directors and is recommended at the general meeting. The number of dividends can be reduced relative to that recommended by the board of directors. The distribution of dividends is proportional to the invested funds, depending on the number of shares purchased.
Ordinary shares of UK companies can be either listed on the Main Market or admitted to the Alternative Investment Market (AIM). The Main Market securities are more liquid and can be found on the Stock Exchange Electronic Trading Service (SETS). Less liquid Main Market securities are traded on SETSqx (quotes and crosses). It is also possible to find some AIM admitted securities on the Stock Exchange Automated Quotation System (SEAQ).
Enterprises that would like to join the Main Market can choose between the Premium and Standard Listing. The Premium Listing members are required to follow the UK rules in addition to the EU standards requirements. The Standard Listing allows members to access the Main Market by complying only with the EU directives.
Ordinary shares are the most popular shares that give the holders the right to vote at the annual meetings, get dividends, and receive part of the property in the case of the issuer company liquidation.
Ordinary shares are divided into class A, class B, and targeted shares. Class A shares are available only to founders whereas class B shares are available for purchase for a wider range of investors. Targeted shares are available to a limited number of investors and are issued for specific purposes.
The benefits or ordinary shares are their simplicity and popularity whereas the drawbacks are the dependence on the issuer company management and absence of the dividends guarantee. In the UK, ordinary shares can be listed either on the Main Market or the Alternative Investment Market (AIM).
Now you know what are ordinary shares in a company and what are their types. For more information, refer to our financial dictionary at https://www.monfex.com/financial-dictionary