Ordinary Share

Background

In corporate finance, an ordinary share represents equity ownership in a company, distinct from other forms of financial assets such as *debentures and *preference shares. The concept and significance of ordinary shares vary slightly across different jurisdictions, but universally, they symbolize a stake in a company’s capital and potential profits.

Historical Context

The issuance of ordinary shares is a cornerstone practice in modern corporate structures and it dates back to early joint-stock companies in Europe during the 17th century. By allowing many investors to pool resources, companies could pursue larger ventures with dispersed risk. Over time, legislative and market innovations have refined the rights and responsibilities attached to ordinary shares.

Definitions and Concepts

An ordinary share is a type of equity security representing partial ownership in a company. Holders of ordinary shares:

• Are entitled to a share of the company’s profits through dividends.
• Generally possess the right to vote at shareholder meetings.
• Are last in line in claims to the company’s assets in case of liquidation, after debentures and preference shares.

Often, these shares are contrasted with preference shares, which typically provide fixed dividends but lack voting rights, and debentures, which are debt instruments with a fixed interest return.

Major Analytical Frameworks

Classical Economics

Under classical economics, the introduction and spread of joint-stock companies enhanced capital allocation, operational efficiency, and spurred economic growth. Ordinary shares facilitated these dynamics by democratizing capital investment.

Neoclassical Economics

Neoclassical frameworks interpret ordinary shares as tools for optimizing resource allocation and maximizing shareholder value. The emphasis is on market efficiency and the role of information symmetry in stock markets.

Keynesian Economics

Keynesian economics attributes significant importance to equity markets wherein ordinary shares reflect sentiments and expectations about macroeconomic conditions. Fluctuations in share prices can influence overall economic activity via the wealth effect.

Marxian Economics

From a Marxian perspective, ordinary shares epitomize capitalistic production modes, where shareholders own means of production indirectly and receive part of surplus value generated by labor. This relationship forms a basis for class analysis and critique.

Institutional Economics

The role of ordinary shares can be understood through institutional frameworks highlighting regulatory environments, corporate governance mechanisms, and investor protections ensuring market stability and fair practices.

Behavioral Economics

Behavioral economics scrutinizes the variances in investor behavior, recognizing that decisions regarding ordinary shares are influenced by prospect theory, herding effects, and market psychology, often leading to anomalies like bubbles and bursts.

Post-Keynesian Economics

Post-Keynesian perspectives might emphasize the speculative nature of ordinary shares and their implications for financial instability. The focus could be on the intrinsic volatility of equity markets driven by fluctuating expectations.

Austrian Economics

Austrian Economic theories can position ordinary shares within broader entrepreneurial activities and market processes. Share prices are viewed as emergent from individual valuations and subjective expectations of future returns.

Development Economics

In developing economies, ordinary shares often symbolize emerging formal financial systems, enabling capital mobilization essential for industrialization and economic development. Stock exchanges in these regions become hubs of attracting foreign investment.

Monetarism

Monetarism might regard ordinary shares in the context of monetary policy’s influence on equity markets, particularly how money supply changes can alter investment behaviors and share valuations.

Comparative Analysis

Ordinary shares across different jurisdictions exhibit variations in terms of voting rights, dividends, and regulatory environments. For example, while the UK term is ordinary share, the US equivalent is common stock, yet they fundamentally serve the same financial function but within different legal and corporate frameworks.

Case Studies

1. UK Financial Market: Examining the London Stock Exchange’s regulatory framework and the performance of FTSE 100 companies.
2. US Financial Market: Analysis of the New York Stock Exchange, including the implications of the Sarbanes-Oxley Act on ordinary shares.

Suggested Books for Further Studies

1. “The Intelligent Investor” by Benjamin Graham
2. “Irrational Exuberance” by Robert J. Shiller
3. “Principles of Corporate Finance” by Richard A. Brealey and Stewart C. Myers

Related Terms with Definitions

• Preference Share: A type of share that offers fixed dividends and payment priority over ordinary shares but typically lacks voting rights.
• Debenture: A long-term debt instrument issued by a company with a fixed interest rate, repayable upon maturity. Commonly unsecured.
• Voting Rights: Entitlements allowing shareholders to vote at company meetings on key issues.
• Dividend: A payment by a corporation to its shareholders, usually as a distribution of profits.

Understanding ordinary shares is crucial for anyone involved in financial markets, corporate governance, and investment decision-making. These