Common Shares

Types of Ordinary Shares

Depending on the type, the following types of shares are distinguished:

• Blue chips or first-tier shares

These are shares of the most well-known and large issuers, companies with the highest market capitalization. These shares tend to grow in the long term. A key characteristic of blue chips is their high liquidity, i.e., the ability to buy or sell shares as quickly as possible. Liquidity is closely related to the number of shares in free float (free-float). Usually, the higher the free float, the higher the liquidity of the shares and vice versa.

The concept of blue chips is subjective; there are no clear criteria that define whether a company’s shares belong to blue chips.

The most liquid shares on the Russian market are Gazprom shares and Sberbank shares and others.

• Second-tier shares

These are usually shares that are not included in the list of the most liquid, actively traded securities on the exchange. The concept of second-tier shares is also subjective.

Second-tier shares usually are not included in the main stock indices. Most second-tier shares on the Russian market are included in the special index RTS-2.

How much do ordinary shares cost?

Ordinary shares can have different values:

• Nominal value

This is the value of the share indicated on the share itself upon its issuance. Sometimes this value is called par value. The authorized capital of any company is equal to the total sum of issued shares with a nominal value. The nominal value of ordinary shares is always the same. This is not the real value of the shares, but sometimes it is used for operations such as assessing duties, tariffs, and commissions on an underdeveloped stock market. During initial public offering (IPO), the share price should not be lower than the nominal value, usually companies mark up by 10-30%.

• Issue value

This is the value of the share at the time of its initial issuance. Usually, the issue value is almost always equal to the nominal value of the share. The difference between the issue value and the nominal value is called issue profit.

• Market value

This is the price that forms on the stock market. The market price of shares is determined on exchanges, reflecting the balance of supply and demand.

Many factors influence the market value of shares, for example, macroeconomic conditions of the country, politics, technical value, central banks, and investment funds. It is important to remember one thing – on the stock market there are bulls and bears, the former buy securities, the latter sell them. The liquidity of stock exchanges is the main factor in forming the price. Usually, the market value reflects the liquidation value.

• Book value

This is the value of all company assets in total, which are issued in circulation. When the market price is below the book value, it may indicate future stock market growth. The book value of shares is usually checked by auditors.

What rights do common shares give to the owner?

• Right to receive dividends

Shareholders of ordinary shares have the right to receive a portion of the company’s net profit proportional to their participation in the company’s equity in the form of dividends. However, their payment is not mandatory for the company and depends on the decision of the board of directors. It should be noted that holders of preferred shares have the first right to receive dividends, usually fixed. In other words, dividends on ordinary shares are paid after paying all relevant taxes and a fixed percentage to preferred shareholders. Meanwhile, the percentage of profit going toward paying dividends on ordinary shares can be zero, meaning the company may decide not to pay dividends based on the overall condition of the enterprise.

• Right to receive part of the company’s assets in case of liquidation

Owners of common shares have the right to receive part of the money obtained from the sale of the company’s assets in case of liquidation. They occupy the lowest position in the hierarchy of rights, after bondholders, creditors of the company, and owners of preferred shares. In other words, common shareholders may not necessarily receive any payments as a result of the company’s liquidation, since the proceeds may not even be sufficient to meet obligations to creditors.

• Voting rights

Unlike preferred shares, ordinary shares give their owners the right to vote in the appointment of the board of directors and on other fundamental issues, such as amendments to the company’s charter, mergers, sale of parts of assets, and liquidation. It should be noted that some classes of ordinary shares may not have voting rights, which must be specified in the charter and allowed by the legislation in the relevant jurisdiction.

• Right to compensation in case of merger or acquisition of the company

If the board of directors and the shareholders’ meeting approve the decision to merge or acquire the company, holders of ordinary shares have the right to compensation, which can be carried out in the form of repurchase of their shares, or in the form of shares of the new company.

• Right to liquidity

Owners of ordinary shares have the right to sell them at any time on open trades or through private deals.

Income from Ordinary Shares

Looking at the statistics, we can see the following picture: on average, ordinary shares bring 11-12% per year of the nominal value, making them leaders among other

FAQ

What are ordinary shares?

Ordinary shares are securities that allow owners to participate in a company’s management through voting rights but do not guarantee fixed dividends.

What rights do ordinary shares provide?

Ordinary shares give the right to receive dividends, vote on company matters, and receive part of the company’s assets during liquidation, among other benefits.

How is the value of ordinary shares determined?

The value of ordinary shares includes nominal value, issue value, market value, and book value, each reflecting different aspects of the share’s worth.