What Are Ordinary Shares? Meaning, Examples, Pros and Cons

Ordinary shares are the foundation of modern equity markets, representing ownership in a company and giving investors rights such as voting power and the potential to receive dividends. They are also known as common stock in the United States and remain the most widely traded form of equity worldwide. In this guide, we explain the ordinary shares meaning, how they work, their advantages and disadvantages, and how you can access global shares through CFD trading with VT Markets.

What Are Ordinary Shares?

Ordinary shares are the most common type of equity issued by companies. They represent partial ownership of a business and give shareholders certain rights, such as voting at meetings and the chance to receive dividends if the company is profitable. Understanding the ordinary shares meaning is essential for investors, as they carry both potential rewards and risks compared to other forms of investment like bonds or preference shares.

Key Characteristics of Ordinary Shares

• Voting rights: Shareholders can vote on major company decisions such as electing directors or approving mergers.
• Dividends: Payments are not fixed and depend on company performance.
• Residual claim: In case of liquidation, ordinary shareholders are paid after creditors and preference shareholders.
• Capital growth: The value of ordinary shares can rise if the company performs well.
• Transferability: They are usually easy to buy and sell on public exchanges.

Example: Consider HSBC Holdings, a multinational bank listed on the London Stock Exchange. When an investor buys HSBC’s ordinary shares, they gain part ownership in the company. This entitles them to vote at annual general meetings and potentially receive dividends when the bank reports strong earnings. If HSBC’s share price rises from £5 to £7, a shareholder who bought 1,000 shares would see the value of their investment grow from £5,000 to £7,000.

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How Ordinary Shares Work

Owning an ordinary share makes you a shareholder, which means you own a piece of the company, no matter how small. If a firm has 100 million shares outstanding and you own 1,000 of them, your stake equals 0.001 percent.

The value of ordinary shares depends on the company’s performance and market demand. Prices rise when investors expect growth and fall when confidence declines. Dividends may be distributed when profits are strong, but they are not guaranteed. For instance, in 2023, Shell paid billions in dividends to shareholders, while many smaller firms in the same year reinvested profits back into operations and paid no dividend at all.

Rights and Responsibilities of Shareholders

Owning ordinary shares comes with both rights and responsibilities:

• Voting rights: Shareholders can vote on major decisions at annual general meetings.
• Dividends: If declared, shareholders are entitled to receive dividends.
• Information access: Companies must provide annual reports and financial statements to shareholders.
• Residual claims: In the event of liquidation, ordinary shareholders are last in line after creditors and preference shareholders.
• Responsibility: The main risk is financial. If the share price falls, your investment loses value, but liability is limited to the amount invested.

Advantages of Owning Ordinary Shares

Investing in ordinary shares offers several potential benefits for individuals seeking growth, income, and influence within a company. While returns are not guaranteed, these shares remain one of the most popular ways to build long-term wealth.

1. Capital growth

Share prices can rise substantially over time, creating wealth for long-term investors. For example, a £1,000 investment in Apple’s shares in 2010 would now be worth more than £10,000, showing how ordinary shareholders can benefit from company growth.

2. Dividends

When companies generate healthy profits, they often return part of these earnings to shareholders through dividends. Firms like Unilever and BP have a long history of rewarding ordinary shareholders with regular dividend payouts.

3. Voting power

Owning ordinary shares gives investors the right to vote at annual general meetings. This means shareholders can influence major company decisions, from electing board members to approving mergers.

4. Liquidity

Ordinary shares are traded daily on stock exchanges, making them easy to buy and sell. For instance, a retail investor can purchase or sell shares of FTSE 100 companies such as Tesco or HSBC within seconds through a trading platform.

Disadvantages of Owning Ordinary Shares

While ordinary shares provide growth and income opportunities, they also carry risks that investors must carefully consider before committing their capital.

1. Dividend uncertainty

Unlike preference shares or bonds, dividends on ordinary shares are not guaranteed. A company may reduce or cancel payouts during difficult times, as many UK firms did in 2020 when the pandemic hit.

2. Market volatility

Share prices fluctuate daily, influenced by company performance, economic cycles, and global events. For example, airline stocks lost more than half their value in early 2020 due to global travel restrictions.

3. Residual claim risk

In the event of liquidation, ordinary shareholders are last in line after creditors and preference shareholders. This often means receiving little to nothing if a company collapses.

4. Higher risk compared to bonds

Ordinary shares carry more risk than fixed-income investments. During the 2008 financial crisis many bank shareholders saw their investments fall by over 80 percent while bondholders continued receiving interest.

How to Trade Ordinary Shares with VT Markets

You cannot buy ordinary shares as physical assets through VT Markets. Instead, the platform offers Contracts for Difference (CFDs) on shares, which allow you to speculate on the price movements of global companies like Apple, Tesla, or HSBC without actually owning the underlying stock.

Trading share CFDs with VT Markets works as follows:

Step 1: Understand how ordinary shares work

Learn the basics of what ordinary shares are, how they generate value, and the difference between direct ownership and trading CFDs.

Step 2: Open an account

Register with VT Markets and complete the quick verification process to get access to the trading platform.

Step 3: Deposit funds

Add money to your trading account using secure and convenient payment options.

Step 4: Place your first order

Choose a share CFD (for example, Apple or Amazon) and decide whether to go long (buy) if you expect the price to rise or go short (sell) if you anticipate a decline.

Discover the key differences between a long position and a short position.

Step 5: Implement risk management strategies

Use risk management strategies like stop-loss and take-profit orders to manage potential losses and lock in profits.

Step 6: Stay informed

Keep up with company earnings, market news, and economic data to make better trading decisions.

Ordinary Shares vs Preference Shares

While ordinary shares are the most common type of equity, some companies also issue preference shares. Both represent ownership in a business, but they differ in rights, risks, and rewards. Ordinary shares typically appeal to investors seeking growth and voting power, whereas preference shares attract those who prefer fixed income and lower risk.

For example, if a company goes into liquidation, preference shareholders are paid first. Only if assets remain will ordinary shareholders receive a payout, which highlights the higher risk but also the potential higher reward of ordinary shares.

Summary

Ordinary shares represent company ownership, offering shareholders voting rights, dividend potential, and long-term growth opportunities, but also carrying risks such as market volatility and residual claims in liquidation. Compared with preference shares, they provide more growth potential but less security. At VT Markets, we provide alternative ways to access shares by offering share CFDs, allowing you to speculate on the price movements of global companies like Apple, Tesla, and HSBC without directly owning the stock.

Start Trading Today with VT Markets

While you cannot purchase ordinary shares directly through VT Markets, we provide an alternative way to access global companies through share CFDs. This allows you to speculate on price movements of major stocks such as Apple, Tesla, and HSBC without owning the underlying assets.

With competitive spreads, flexible leverage, and advanced trading platforms like MetaTrader 4 (MT4) and MetaTrader 5 (MT5), VT Markets makes it simple to trade shares alongside other asset classes such as forex, commodities, and indices. You can also practise risk-free using a VT Markets demo account before moving to live markets, and our dedicated Help Centre is available to support you at every step.

Start trading today with VT Markets and experience fast, secure access to global share CFDs.

Frequently Asked Questions (FAQs)

1. What are ordinary shares?

Ordinary shares are the most common type of stock, giving investors ownership in a company and rights such as voting and dividends.

2. Do all ordinary shares pay dividends?

No. Dividends depend on company profits and board decisions.

3. Are ordinary shares risky?

Yes, because their value fluctuates with market conditions and dividends are not guaranteed.

4. What is the difference between ordinary and preference shares?

Preference shares usually provide fixed dividends and priority in liquidation, while ordinary shares offer voting rights and higher long-term growth potential.

5. Can I trade ordinary shares with VT Markets?

No, VT Markets does not provide direct ownership of ordinary shares. However, you can trade share CFDs, which allow you to speculate on the price movements of global companies like Apple, Tesla, or HSBC without owning the actual shares.

6. Can ordinary shares lose all their value?

Yes. If a company goes bankrupt and its assets are not enough to cover debts, ordinary shareholders may lose their entire investment.

7. Are ordinary shares the same as common stock?

Yes. In the United States, “common stock” is the equivalent term for ordinary shares.

8. Do ordinary shareholders get paid before preference shareholders?

No. Preference shareholders receive dividends and liquidation proceeds before ordinary shareholders.