July 5, 2020

SB-Accounting

Accounting + Finance Blog

Ordinary shares: meaning and key explanations

Holding share signifies that an individual owns a portion of the business. But, there are various ways shares can be owned. Generally, two types of shares are known. Ordinary (common) shares and preference shares. Let’s focus on ordinary shares.

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Meaning of ordinary shares

Ordinary shares can be defined in three ways.

Definition base on voting right

Here, ordinary shares are shares whose holder has exclusive right to vote at the annual general meeting of the company.

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Definition base on dividend

In this case, ordinary shares are shares whose holder received dividends after all other stakeholders have received dividends and interest. And these holders receive a variable dividend.

Definition base on liquidation

Ordinary shares are shares that the holders, upon the company’s liquidation, are entitled to the assets of the company only after all other stakeholders have been paid.

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Key Explanations

Ordinary shares have holders. The holders of ordinary shares are referred to as ordinary shareholders. These persons had invested a lump sum of money by buying ordinary shares from the company through a stock exchange or an Initial Public Offering (IPO).

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Ordinary shares have voting rights. The right to vote is a primary feature of ordinary shares. A unit of shares means a single voting right. A holder of 50 shares means 50 voting rights.

Voting rights can as well be examined based on the total amount of shares issued by the company. A company may have 1000 issued shares. If Mr. Ben acquired 100 shares. It means he has 10 percent voting rights. If Mrs. Yemi holds 400 shares. It implies 40 percent voting rights.

A single vote by Mrs. Yemi at one of the annual general meetings of the company with 1000 issued share capital will have a great impact than that of Mr. Ben.

Ordinary shares are paid dividends. The holders of ordinary shares are made dividend. However, they receive dividends only when other stakeholders have received interest and dividend. Who are these other stakeholders?

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These stakeholders include bondholders, banks and creditors, and preference shareholders. First, interest is paid to bondholders and banks (when a loan is involved). Next, preference shareholders, if any are paid dividends. Lastly, ordinary shareholders earn dividends if profit is not exhausted.

Ordinary shares dividends are variable. The holders of ordinary shares received a variable dividend. In other words, their dividend is not fixed at a particular percentage. Company XYZ may declare a dividend of 2 Naira per share this year. But next year the dividend may increase to 2.37 Naira per share or reduced to 1.90 Naira per share.

Finally, on liquidation, ordinary shares are the least to consider. If the company faces liquidation, other stakeholders are paid in full from the company’s assets. If the assets of the company were unable to pay other stakeholders in full, then ordinary shareholders will not receive any entitlement from the company.

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For example, if the total assets at market value for a liquidated company are 1 million Naira. Assuming other stakeholders are entitled to 800,000 Naira and holders of ordinary are entitled to 600,000 Naira. The other stakeholders will be paid in full. However, the remaining 200,000 Naira will be shared proportionately among the ordinary shareholders.

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In conclusion, ordinary shares are variable income earners. Their power to vote at an annual general meeting and extraordinary meetings make them more valuable and real owners of the company concerned.

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