# Understanding Ordinary Shares: Definition, Benefits, and Voting Rights

## What Are Ordinary Shares?

Ordinary shares, or common shares, represent a fraction of company ownership and provide voting rights at shareholder meetings. Unlike preferred shares, ordinary shareholders are not guaranteed dividends but can still benefit when the company profits. Most shares on U.S. stock exchanges are ordinary shares, and they offer the opportunity for voting and potential rewards without guaranteed dividends.

### Key Takeaways

*   Ordinary shareholders have voting rights in company decisions but are last in line for dividends and liquidation payouts.  
    
*   Dividends for ordinary shares are decided by a company's board and are not guaranteed.  
    
*   Ordinary shareholders can potentially gain more during profitable times compared to preferred shareholders.  
    
*   Preferred shares provide a fixed dividend and are prioritized over ordinary shares in profit distribution.  
    
*   The market value of ordinary shares is often significantly higher than their par value due to investor demand.

## How Do Ordinary Shares Work?

An ordinary share represents a fraction of ownership in the corporation that issues it. As an owner, the shareholder gets a vote in the company's major decisions, decided at its shareholder meetings.

The shareholder may or may not receive a dividend. The company's board of directors decides whether a dividend will be awarded, and how much it will be. The dividend represents the stock owner's share of the profits of the corporation over the past quarter or year.

A corporation may also issue [preferred shares](https://www.investopedia.com/terms/p/preferredstock.asp). These are a kind of hybrid of a stock and a bond. Their owners are guaranteed a set dividend payment. The price of the shares may rise or fall but is not as volatile as the common stock price. Investors in preferred shares are motivated primarily by the steady income from dividends.

![Ordinary Shares: Company shares that carry the right to vote at meetings but don't guarantee a dividend.](https://www.investopedia.com/thmb/oUqERlzOUn5AAIVJCDgcHGgRxaA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ordinaryshares.asp-final-31256df0a0b54074a016627c4ef2cc77.png)

*— Investopedia / Mira Norian*

### What Rights Do Ordinary Shareholders Have?

Ordinary shareholders can receive leftover company profits as dividends, but only after preferred shareholders are paid.

This could be negligible if the company decides to reinvest all spare cash, leaving no profits for dividends. If a company fails, ordinary shareholders can claim leftover [economic value](https://www.investopedia.com/terms/e/economic-value.asp), but only after others, like bondholders and preferred shareholders, are paid.

### Advantages of Holding Ordinary Shares

Ordinary shareholders take on greater financial risk than preferred shareholders of a corporation, but they also may reap greater rewards. If a company makes a large profit, the creditors and preferred shareholders do not receive more than the fixed amounts to which they are entitled, while ordinary shareholders may divide the windfall among themselves.

The same occurs when companies such as start-ups are sold to larger corporations. Ordinary shareholders usually profit the most.

In addition to the right to residual profits, shareholders are entitled to vote for the company's board members and to receive and approve the company's annual financial statements. (Some preferred shareholders also receive voting rights.)

### How Is the Value of Ordinary Shares Determined?

Ordinary shares often have a low "par value" or face value, which is mostly symbolic and usually just a few cents. The market price of ordinary shares depends on the business's value, investor opinions, and market trends.

For example, Berkshire Hathaway's Class A shares ([BRK.A](https://www.investopedia.com/markets/quote?tvwidgetsymbol=brk.a)) have a $5 par value but traded over $325,000 per share in early September 2020.

## The Bottom Line

Ordinary shares, or common shares, offer shareholders a proportionate ownership in a company, coupled with voting rights. While dividends are not guaranteed, ordinary shareholders stand to benefit from significant profits if the company performs well. In contrast to preferred shares, common stockholders may experience more volatility and financial risk but are poised to reap potentially higher rewards. Understanding the dynamics of ordinary shares can empower investors to make informed decisions based on their risk tolerance and investment strategy.