Owning ordinary shares in a business means owning a fraction of that business, and being able to vote on decisions taken at shareholder meetings. Ordinary shares offer the chance of higher financial gains than other types of share; however, you also have a higher risk of making no gains. If a company is wound up, ordinary shareholders will be the last to be paid.
What is the dividend paid on ordinary shares?
In simple terms the dividend is a share of the profits the company has made and is generally issued every three or six months. The board of directors meets to decide whether the company has performed well enough to pay a dividend to ordinary shareholders. They will also determine how much any dividend will be.
What are preferred shares?
One alternative to investing in ordinary shares is opting for preferred shares. Preferred shares offer a guaranteed dividend payment set at a specific level. Some investors prefer the certainty of a payment of this kind, but miss out on the potential for higher dividends offered by ordinary shares if a company performs well. The dividends on preferred shares will be paid first, and the dividends on ordinary shares will be made up of anything left after the holders of preferred shares have been paid.
What happens to ordinary shares if a company collapses?
As a holder of ordinary shares you’ll be entitled to a share of the value of a company if it is wound up, but only after people like bondholders and preferred shareholders have had their share. In practical terms, someone holding ordinary shares is in the same position as an unsecured creditor in the event of a business collapse.
The pros of investing in ordinary shares
Control – As an ordinary shareholder you get to vote ‘yes’ or ‘no’ regarding major decisions taken by the directors of the company. The board might recommend accepting a takeover bid from another company, for example, but if the ordinary shareholders vote ‘no’ then the directors will have to reconsider their decision.
Dividend – If a company does well then the value of the dividend paid to shareholders with ordinary shares will reflect that success. The company’s stance will also affect the size of any dividends paid – some companies reward their shareholders with large dividends following periods of success, while others prefer to plough the profits back into developing the company.
Other rewards – As well as enjoying the chance to receive larger dividends, holders of ordinary shares are likely to be rewarded if a company that was a start-up when they invested is purchased by a larger company.
The downside of ordinary shares
Risk - The chance to reap large dividends is offset by the risk of making nothing at all if the company does badly. If the business is wound up then investors holding ordinary shares will be at the back of the queue when it comes to getting any of their money back. If there is no money left after all other creditors have been paid, then ordinary shareholders will receive nothing.
Different types of ordinary share
Some ordinary shares are known as contributing shares. This means that only a part of the value of the share has been paid. For example:
A start-up has initial capital of £2,000 made up of 1,000 ordinary shares valued at £2 each. If an investor buys a share – or shares – for £2, then these shares are known as ‘fully paid’ ordinary shares.
In some cases the shareholders may be expected to contribute just 50% of the initial capital. In this case that would be £1,000, so each of the 1,000 ordinary shares cost £1. These are known as partly paid shares, although the shareholder has an obligation to pay the other 50% for each share if asked to do so by the company.
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