What are Ordinary Shares?

Banking & FinanceFinance ManagementGrowth & Empowerment

Ordinary shares, also known as common shares, are used to raise capital for businesses. They are equity stocks that provide voting rights to the shareholders. Usually, dividends on ordinary shares are distributed according to the discretion of the management of the company that issues these shares. The dividends are distributed according to availability of profits. Common shares represent the ownership of shareholders in the company.

Explanation

Common shares provide the ownership rights to shareholders as per their number of shares the shareholders have. These shareholders have the right to voting and they are offered some privileges as an owner of a company. Ordinary shareholders can attend the general meetings of the company and they can vote for the company as an owner too.

The ordinary shareholders get dividends according to the profits of their companies. During the time of liquidation, ordinary shareholders receive their share of the remaining net assets of the company. The market price of ordinary shares is determined using the market forces and according to investors’ sentiments.

Note − Common stocks are the most popular stocks in the market. They are traded in the stock exchanges for raising capital.

Valuation of Ordinary Shares

There are three main methods for valuation of ordinary shares −

  • Asset-Based Method − In asset-based method, the company’s net assets are divided by the total number of ordinary shares outstanding to find the absolute value of each single share. Net assets are valued by deducting total external liabilities from the total assets of the company. Asset based method is mainly popular with distributors, manufacturers, and capital-intensive companies.

  • Income-Based Method − The income-based method is classified into the discounted cash flow (DCF) and price earning capacity (PEC) methods. DCF uses the discounted price of the projected cash flow to get the fair value of an ordinary shares. In the PEC method historical earnings are used to calculate the value of the share.

  • Market-Based Method − In market-based method, the market price of the shares is used for valuation. The market value is usually determined by market forces, type of business, and investors’ sentiments.

Features of Ordinary Shares

  • It comes with voting rights, i.e., an investor investing in ordinary shares in the company will have proportionate ownership.

  • Ordinary shareholders receive dividends declared by the management in yearly basis.

  • Ordinary share has limited liability component i.e. each shareholder will be liable to the company at the time of the liquidation up to the extent of the unpaid share capital they own.

  • Ordinary shares do not have any specific maturity date unless the company buys the shares back or delists it.

Note − Ordinary shares come with some limitations, such as during the liquidation of the company the shareholders will have to bear the burden as owners of the company.

raja
Published on 17-Sep-2021 08:46:33
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