Ordinary shares: Explained
BY TIO Staff
|August 12, 2024Ordinary shares, also known as common shares, represent the most common type of equity ownership in a company. As an investor or trader, understanding the intricacies of ordinary shares is crucial to making informed decisions in the financial market. This comprehensive guide will delve into the world of ordinary shares, providing a detailed explanation of their nature, benefits, risks, and much more.
By the end of this glossary entry, you'll have a thorough understanding of ordinary shares and how they function within the broader context of trading. Whether you're a seasoned trader or just starting out, this guide will serve as a valuable resource in your trading journey.
What are Ordinary Shares?
Ordinary shares, also known as common shares, are units of ownership in a company. When you purchase ordinary shares, you are essentially buying a piece of the company, giving you a claim on part of the company's assets and earnings. These shares are the most common type of shares that companies issue to raise capital.
One of the key characteristics of ordinary shares is that they come with voting rights. This means that as a shareholder, you have a say in the company's major decisions, such as electing the board of directors or approving a merger or acquisition. The number of votes you have typically corresponds to the number of shares you own.
Types of Ordinary Shares
While all ordinary shares represent ownership in a company, there are different types of ordinary shares that come with varying rights and privileges. The most common types include authorized shares, issued shares, and outstanding shares.
Authorized shares are the maximum number of shares that a company is allowed to issue, as specified in its articles of incorporation. Issued shares are the shares that a company has actually issued out of the authorized shares. Outstanding shares are the issued shares that are currently held by investors.
Ordinary Shares vs. Preference Shares
Ordinary shares are often compared to preference shares, another type of equity ownership. The main difference between the two lies in the rights and privileges that they confer to the shareholder.
Preference shares, as the name suggests, give shareholders preferential treatment. This usually means that preference shareholders receive dividends before ordinary shareholders and have a higher claim on the company's assets in the event of liquidation. However, preference shares typically do not come with voting rights.
Benefits of Trading Ordinary Shares
Trading ordinary shares comes with a number of benefits. One of the main advantages is the potential for capital growth. If the company performs well and its share price increases, you can sell your shares for a profit. This is known as capital appreciation.
Another benefit is the potential for income through dividends. Many companies distribute a portion of their profits to shareholders in the form of dividends. As an ordinary shareholder, you are entitled to receive these dividends, providing you with a regular income stream.
Ownership and Voting Rights
As mentioned earlier, one of the key benefits of owning ordinary shares is the voting rights that come with them. As a shareholder, you have a say in the company's major decisions, giving you a level of control over the company's direction.
Moreover, owning shares in a company makes you a part-owner of that company. This means that you have a direct stake in the company's success. If the company does well, so do you.
Access to Company Information
As a shareholder, you also have the right to access certain company information. This includes the company's financial statements, annual reports, and other important documents. This information can be invaluable in making informed trading decisions.
Risks of Trading Ordinary Shares
While trading ordinary shares can be profitable, it also comes with a number of risks. One of the main risks is the potential for capital loss. If the company performs poorly and its share price decreases, you could lose part or all of your investment.
Another risk is the uncertainty of dividends. While many companies pay dividends to their shareholders, there is no guarantee that a company will continue to do so in the future. Moreover, the amount of dividends can vary from year to year, making it an unreliable source of income.
Market Risk
Market risk, also known as systematic risk, is the risk that the entire market will decline, negatively affecting the value of all stocks, including the ones you own. This type of risk cannot be eliminated through diversification.
Market risk can be caused by a number of factors, including economic downturns, political instability, changes in interest rates, and more. As a trader, it's important to be aware of these factors and how they can impact your investments.
Company-Specific Risk
Company-specific risk, also known as unsystematic risk, is the risk associated with a particular company. This could include things like poor management, financial instability, legal issues, and more. Unlike market risk, company-specific risk can be mitigated through diversification.
As a trader, it's important to thoroughly research a company before investing in its shares. This includes analyzing the company's financial statements, understanding its business model, and keeping up-to-date with any news or events that could impact the company.
How to Trade Ordinary Shares
Trading ordinary shares involves buying and selling shares in a company through a stock exchange. The goal is to buy shares at a low price and sell them at a higher price, thereby making a profit.
Before you start trading, it's important to have a clear trading strategy in place. This should include your financial goals, risk tolerance, and trading style. It's also important to stay informed about market trends and news that could impact your investments.
Choosing a Trading Platform
The first step in trading ordinary shares is to choose a trading platform. This is the online service that you will use to buy and sell shares. There are many trading platforms available, each with its own features and fees.
When choosing a trading platform, consider factors such as ease of use, customer service, research tools, and fees. It's also important to choose a platform that is regulated by a reputable financial authority to ensure the safety of your funds.
Researching and Analyzing Shares
Once you have chosen a trading platform, the next step is to research and analyze the shares that you are interested in. This involves looking at the company's financial statements, understanding its business model, and assessing its future prospects.
There are two main types of analysis that traders use: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company's financials and market position, while technical analysis involves studying price patterns and trends. Both types of analysis can be useful in making informed trading decisions.
Conclusion
Trading ordinary shares can be a profitable venture, but it also comes with risks. By understanding the nature of ordinary shares, the benefits and risks of trading them, and how to trade them effectively, you can make informed decisions and potentially increase your chances of success in the financial market.
Remember, trading is not a guaranteed way to make money, and it's important to only invest money that you can afford to lose. Always do your research and consider seeking advice from a financial advisor if you're unsure.
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