Ordinary stock, also commonly known as common stock or ordinary shares, represents ownership in a corporation and confers certain rights to the stockholder or shareholder.
Owners of ordinary shares have the right to:
- Vote on corporate matters: Shareholders usually have the right to vote at the company’s annual general meeting (AGM) on matters such as electing the board of directors and approving major corporate decisions like mergers or acquisitions.
- Receive dividends: Shareholders may receive a portion of the company’s profits in the form of dividends, although the company’s board of directors usually decides whether to distribute these dividends or to reinvest the profits back into the company.
- Claim on assets: In the event of liquidation of the company, common shareholders have a claim on the remaining assets after the liabilities have been paid off and after preferred shareholders (if any) have been paid.
However, it’s important to note that ordinary shareholders are at the bottom of the priority list in terms of claims to the company’s assets. This means that if a company goes bankrupt, the ordinary shareholders will be the last to be paid, after creditors, bondholders, and preferred shareholders.
The value of ordinary shares can rise or fall based on the company’s performance, and investors can profit from selling their shares at a higher price than they purchased them. However, they also bear the risk of losing their investment if the company does not perform well.
Example of Ordinary Stock
Let’s consider an example involving a fictional tech company, TechCo.
TechCo has just made an initial public offering (IPO), selling shares of its ordinary stock to the public. As an investor, you decide to buy 100 shares at the initial price of $20 per share, for a total investment of $2,000. By buying these shares, you become an ordinary shareholder in TechCo. This gives you certain rights and potential benefits:
- Voting rights: At TechCo’s annual general meeting, you’ll have the right to vote on certain matters. Typically, each share gives you one vote, so your 100 shares give you 100 votes.
- Dividends: If TechCo makes a profit and the board of directors declares a dividend, you may receive a portion of the profit as a cash payment. The size of the dividend will depend on how many shares you own and the amount of profit the company decides to distribute.
- Capital gains: If TechCo performs well, the market price of its shares may rise. For instance, if the price per share rises to $30 and you decide to sell your shares, you would receive $3,000 ($30 * 100 shares), making a profit of $1,000.
- Claim on assets: If TechCo were to go bankrupt and its assets were sold off, you would have a claim to a portion of the proceeds. However, as an ordinary shareholder, your claim would only be considered after the claims of creditors, bondholders, and preferred shareholders.
Keep in mind that as an ordinary shareholder, you also bear certain risks. If TechCo doesn’t perform well, the share price might drop below the price you paid, and you could lose a portion or all of your initial investment if you decide to sell. Also, while potential dividends can be a benefit, they’re not guaranteed; the board of directors might decide to reinvest the profits back into the company instead of paying dividends.