Common shares

3 key takeaways

• Common shares represent ownership in a company and entitle shareholders to voting rights and potential dividends.
• Shareholders of common shares have residual claims on a company’s assets and earnings, meaning they are entitled to receive dividends after preferred shareholders and creditors are paid.
• Common shares may offer the potential for capital appreciation if the company’s value increases, but shareholders also bear the highest level of risk compared to other classes of shares.

What are Common Shares?

Common shares, or ordinary shares, represent ownership stakes in a corporation and confer certain rights to shareholders, such as voting rights and the right to receive dividends. Holders of common shares are considered residual owners of a company, meaning they have a claim on the company’s assets and earnings after all debts, obligations, and preferred shareholder claims have been satisfied. Common shareholders typically have the right to vote on important corporate matters, such as electing the board of directors and approving major decisions affecting the company.

Importance of Common Shares

• Ownership Stake: Common shares provide investors with an ownership stake in a company, allowing them to participate in its success and growth.
• Voting Rights: Shareholders of common shares typically have the right to vote on corporate decisions, such as electing directors and approving mergers or acquisitions.
• Dividend Potential: While not guaranteed, common shareholders may receive dividends if the company generates profits and chooses to distribute them to shareholders.
• Capital Appreciation: Common shares may offer the potential for capital appreciation if the company’s value increases over time, allowing shareholders to sell their shares at a higher price than they paid.

How Common Shares work

Common shares function as follows:

Ownership Rights

Common shareholders have ownership rights in the company, including the right to receive information about the company’s operations and financial performance and the right to vote on corporate matters.

Dividend Payments

Companies may choose to distribute a portion of their profits to shareholders in the form of dividends. Common shareholders are entitled to receive dividends, although the company’s board of directors determines the amount and timing of dividend payments.

Capital Appreciation

Common shares may increase in value over time if the company’s earnings and prospects improve, leading to capital appreciation for shareholders. However, share prices can also decline if the company performs poorly or faces adverse market conditions.

Risk Exposure

Common shareholders bear the highest level of risk among all stakeholders, as they are the last to be paid in the event of bankruptcy or liquidation. If the company fails or performs poorly, common shareholders may lose their entire investment.

Examples of Common Shares

• Company XYZ: Shares of Company XYZ are traded on the stock exchange, representing ownership in the company and entitling shareholders to vote at annual meetings and receive dividends.
• Tech Startup: Investors purchase common shares in a tech startup, hoping to benefit from the company’s growth and success over time.
• Family-owned Business: Family members hold common shares in their family-owned business, participating in decision-making and sharing in the company’s profits.

Real-world Application

• Investment Portfolios: Individual investors include common shares in their investment portfolios to diversify their holdings and potentially earn returns through capital appreciation and dividends.
• Corporate Governance: Institutional investors exercise their voting rights as common shareholders to influence corporate governance and hold management accountable for decisions affecting shareholder value.
• Employee Stock Ownership Plans (ESOPs): Companies offer common shares to employees as part of their compensation package or through ESOPs, aligning employees’ interests with those of shareholders and promoting employee ownership.