Ordinary Shares

Ordinary shares is the equity capital of the firm. The holders of ordinary shares are the owners and are therefore entitled to all distributed profits after the holders of debentures and preferences shares have had their claims met.  

The vast majority of shares issued by companies are ordinary shares. When you buy one of these you are buying a set of legal rights. Significantly, one of the rights you do not receive is a guarantee of any return on the money you hand over to buy the ordinary shares. The company, run by its managers, has no obligation either to give you a dividend (a payout of profit) or to hand your capital back. The managers may promise to do their best with the financial resources entrusted to them, but they cannot be legally forced to give a return. This contrasts sharply with the deal the company agrees to with bank lenders. Here the company is legally responsible to provide regular interest payments and payoff the capital at the end of the loan term.

It does not sound like such a good deal for the ordinary shareholders. They put money in, they cannot take it out again (the best they can hope for is to sell the holding to another investor), and the company has no obligation to pay them anything. It gets worse. If the company is wound up, then the assets are sold and the shareholders will be entitled to receive a share of the money raised from the sale. Ah yes, but not until all other interested parties have had their guaranteed amounts first. So if taxes are owed the Inland Revenue gets its money, and then it's the turn of the various lenders and trade creditors (suppliers of goods and services not yet paid). If the company issued preference shares then these holders are entitled to receive a payment. It is only in the (unlikely) event that there is any money left after so many snouts in the trough that the ordinary shareholders get anything.

Given these disadvantages of shares, there must be something attractive to entice investors. There is. Shareholders own all the value that is created by a business after lenders and others have received the amounts they are owed. If the business does well then it is perfectly possible for a US$1,000 investment in ordinary shares to become worth over US$1 million. It has happened time and again. There are millionaires today who put relatively small amounts into companies destined to become market leaders - Racal Vodafone, Glaxo, Microsoft, Intel, and Berkshire Hathaway are just a few examples.