According to the Companies Act 2013, a share represents the extent of a shareholder’s interest in a company’s assets. In simpler terms, shares signify a shareholder’s ownership stake in the company.
Ordinary shares or common shares refer to company stock that grants shareholders voting rights at company meetings and entitles them to a portion of the company’s profits through dividends. In this blog, you will understand what are ordinary shares, how they are different from preference shares, their key features and how you can buy ordinary shares of a company.
What are Ordinary Shares?
Ordinary shares definition is simple, as these are equity or common shares, which are a type of stock a company issues under the Companies Act, 2013. These shares indicate your ownership in the company and grant some specific rights, such as the right to vote on corporate matters during general meetings.
It helps to understand that each share represents a fraction of ownership in the company. The more shares you hold, the larger your ownership and influence over the company’s decisions. For instance, if ABC Limited issues 300,000 ordinary shares and you acquire 210,000 of them, you will own 70% of the company, giving you substantial control over its operations.
What is the Difference Between Ordinary Shares and Preference Shares?
Follow this table to know the difference between ordinary and preference shares:
| Aspect | Preference Shares | Ordinary Shares |
| Dividends | The dividend rate is predetermined and fixed. | Dividends do not have a fixed rate and may vary. |
| Eligibility for Bonus Shares | Not eligible to receive bonus shares. | Eligible to receive bonus shares. |
| Claim on Dividends Arrears | Preference shareholders have the right to claim unpaid dividends from previous years. | Ordinary shareholders do not have the right to claim unpaid dividends. |
| Role in Management | They do not participate in the company’s management decisions. | Ordinary shareholders have a say in the management and decision-making process. |
| Voting Rights | Preference shareholders do not possess voting rights in company decisions. | Ordinary shareholders can vote on key company matters. |
| Fundraising Purpose | Used by companies to raise capital, typically with guaranteed dividends. | Used by companies to raise capital, with shareholders having a stake in decision-making. |
What are the Main Characteristics of Ordinary Shares?
Ordinary shares have several features that differentiate them from other types of shares such as:
-
Ownership
Holders of ordinary shares are considered partial owners of the company. Your ownership stake is determined by the number of shares you hold relative to the total shares issued by the company.
-
Voting Rights
Since ordinary shareholders are part-owners, you get voting rights in the company’s general meetings. This allows you to participate in the company’s decision-making process.
Generally, each ordinary share carries one vote, which means you are a shareholder with a larger number of shares. You will have greater voting rights.
However, some companies may structure their voting rights differently by assigning varying voting power per share. These shares are known as DVR (Differential Voting Rights).
-
Dividends
Ordinary shareholders are entitled to receive a portion of the company’s profits through dividends. However, dividend payments are not guaranteed and are subject to the company’s financial performance and discretion.
Companies with strong financials often distribute dividends regularly, while others may choose to reinvest earnings back into the business rather than distribute them to shareholders.
-
Residual Claim in Liquidation
In the event of a company’s liquidation or winding up, ordinary shareholders are entitled to a share of the company’s residual assets. This refers to any remaining funds after all debts and financial obligations have been settled.
However, you are last in line for repayment, meaning they only receive a portion of the remaining assets if anything is left after creditors have been paid.
How Can You Buy Ordinary Shares?
This is the simple procedure to buy ordinary shares online:
-
Open Your Demat Account
To make transactions in the stock market, you must have a Demat account. If you do not have a Demat account, you need to open it first. Before you open, you have to gather the required documents, such as your Aadhaar card, PAN card, bank account details, etc.
While choosing your stockbroker, please check how much fees you have to pay in terms of account opening fees and annual maintenance charges. If you do not want to give these charges, you can open your Demat account with us.
Yes! At Torus Digital we offer a 2-in-1 (Demat+trading account) and a 3-in-1 (Demat+trading+savings account) Demat accounts with no annual maintenance charges.
-
Add Funds to Your Account
To start investing in ordinary shares, you have to add funds to your account. For that, you have to use the same account you linked with your Demat account during the account opening process.
If you deposit funds from a bank account which do not match your name, you will not be able to deposit funds. After you deposit, you can instantly check your balance available in the account in the funds section.
-
Place Buy Order
Now, you have completed all the required set-up. After that, choose the ordinary share you want to invest your money in and search for the same from the search bar. Click on the buy option and enter the required details such as quantity, stock exchange, and price type (limit or market) and place a buy order.
Therefore, when the share price matches your given price, your order will be executed. After that, you will see the shares in your portfolio section.
Summing Up
Ordinary shares are widely traded in the stock market and, with proper knowledge, can be a wise investment for you. Their advantages, including ownership rights and potential financial gains, are largely influenced by the company’s performance and strategic policies. As with any investment, conducting thorough research before investing in ordinary shares or other stock market assets is highly advisable.
