What are Ordinary Shares?

Key Highlights

• Ordinary shares can appreciate over time, leading to substantial profits, especially for long-term investors.

• Ordinary shareholders have ownership stakes and voting rights, allowing active participation in company decisions.

• Ordinary Shareholders receive dividends, offering a stable income source when companies distribute profits.

Understanding ordinary Shares

Ordinary shares carry several fundamental characteristics that make them different in the financial landscape. Understanding the characteristics of ordinary shares is essential for investors aiming to navigate the complexities of the stock market effectively. The ability to vote is one of the essential characteristics of ordinary shares. An individual gains the ability to influence important business decisions when they own ordinary shares.

Ordinary shareholders have a unique position in the complex world of a company's liquidation. As a result of all debts and obligations including those of preferred shareholders being paid off, they are entitled to a piece of the company's residual claim, which is its asset.

Various Types of Ordinary Shares ?

Ordinary shares are available in a number of forms, each with unique characteristics and investment implications. Anyone thinking about investing in the stock market needs to understand these types.

1. Ordinary Shares with Voting Rights

The right to vote on important business decisions, such as the selection of board members and important corporate policies, is granted to shareholders holding this type of ordinary share. With a normal share worth one vote, shareholders can take an active role in the governance of the company. Ordinary shares with voting rights are extremely beneficial to investors who want to be involved in the decision-making processes of the companies they invest in. By directly influencing the company's policies and direction, these shares allow investors to align their interests with the company's strategic choices.

2. Ordinary Shares with Limited Voting Rights

Certain companies offer their shareholders partial voting rights by issuing ordinary shares with restricted voting rights. One vote per five shares, for instance, or restricted voting rights solely on particular subjects, could be granted to shareholders holding these shares. Compared to holders of regular shares, who have full voting rights, investors holding these shares have less influence over business decisions. Limited voting shares are frequently issued by companies to maintain power among certain groups, such as the founding members or a specific investor.

3. Non-Voting Ordinary Shares

Ordinary shares that are not voting, as the name implies, are not entitled to vote. The company's decisions, including the selection of board members and other company policies, are not subject to the views of the investors who own these shares. Non-voting shares are frequently provided to the public during initial public offerings (IPOs), despite the fact that this may appear to be a disadvantage. They enable businesses to obtain money without reducing the ability of current shareholders to make decisions. Potential capital gains and dividends are given priority by investors selecting non-voting ordinary shares over direct involvement in the company's governance.

4. Sweat Equity Shares

Companies usually give sweat equity shares to directors, employees, and other stakeholders who have been instrumental in the expansion and success of the company. This creative strategy encourages and motivates people to actively participate in a company's development by acknowledging the value of both physical and intellectual efforts.The Securities and Exchange Board of India (SEBI) in India regulates the issuance of sweat equity shares. In order to maintain transparency and equity in the process, SEBI has specified some rules and requirements that companies must follow while issuing sweat equity shares.

What are the Advantages of Ordinary Shares

For both new and experienced investors, knowing the advantages of ordinary shares is crucial since it gives them the understanding they need to effectively capitalise on the stock market's potential.

1. Potential of Capital Appreciation

The ability of ordinary shares to increase in value is one of their main benefits. The market value of companies rises with growth, which drives up the price of their ordinary shares. This appreciation can be quite advantageous to investors, particularly if they maintain their shares for an extended period of time. Ordinary shares are an appealing choice for anyone looking to increase their wealth through investments since they can be sold for more money than they were originally purchased, allowing investors to make large profits.

2. Dividend Income

Investors who buy ordinary shares are eligible to receive dividends, which are parts of a company's profits given to shareholders. Although they are not assured, many established companies have a track record of paying dividends on time. These dividends are a dependable source of income that provides financial stability and supplements other income streams for investors that prioritise income. For individuals seeking both possible capital gains and a reliable income stream, ordinary shares are especially enticing due to the possibility of periodic dividend payments.

3. Ownership & Voting Rights

Ordinary shares allow investors to acquire a portion of the company's shares. They have the right to take part in the growth and success of the company because of their ownership. Ordinary shareholders also typically have voting rights, which provide them the ability to vote on important business decisions including board selection and merger and acquisition approval. By actively participating in the governance of the firm, investors are able to match their interests with the strategic direction of the organisation and feel in control of important decisions.

4. Liquidity

High liquidity is available to investors due to the trading of ordinary shares on stock exchanges. This implies that the price of shares won't be greatly impacted when investors buy or sell shares. The ability to swiftly convert shares into cash enables investors to take advantage of financial necessities, react fast to changes in the market, and capture investment possibilities. For investors, liquidity is essential since it guarantees that their assets may be easily turned into cash when needed, increasing their total financial flexibility.

5. Portfolio Diversification

One of the most important techniques for controlling investment risk is diversity, which is made possible by ordinary shares in an investment portfolio. Investing across a variety of asset classes, sectors, industries, and geographical areas is known as diversification. Investors may mitigate the impact of bad performance in one industry or sector by diversifying their portfolios and offsetting it with strong performance in other areas. Combining ordinary shares with other investment types provides for a more comprehensive and diversified investment plan that improves the portfolio's overall stability.

Conclusion

Ordinary shares are the cornerstone of the financial industry and a key component of ownership in a company. With these shares, every shareholder has an equal voice and the ability to participate in the company's decision-making processes. By buying ordinary shares, investors participate actively in the company's journey, experiencing both its triumphs and setbacks, in addition to investing their money.

Ordinary shares tend to appreciate in value as the company grows, providing investors with the potential for long-term, sizable financial benefits. Because of their potential for profit and the concept of limited liability, ordinary shares are an accessible and versatile investment choice that appeals to a broad range of investors, from individual retail investors to major institutional funds.