Ordinary Shares

Ordinary Shares (also known as 'Common Stock' in the US or 'Equity Shares') are the most common type of stock and represent a slice of ownership in a publicly-traded company. When you buy an ordinary share, you're not just buying a digital blip on a screen; you're becoming a part-owner of the business. This ownership stake gives you a claim on the company's future profits and a right to vote on important corporate decisions. Think of it as buying a tiny piece of Apple, not just its stock ticker. For a value investor, ordinary shares are the fundamental building block of a portfolio. They are the vehicle through which we purchase wonderful businesses at fair prices, aiming to hold them for the long term as they grow in value. Unlike their more conservative cousins, Preference Shares, ordinary shares carry both the greatest potential for reward and the highest risk, as their value is directly tied to the successes and failures of the underlying company.

Imagine a company is a giant pizza. Each ordinary share is one slice of that pizza. If the pizza has 1,000 slices (shares) and you own 10 of them, you own 1% of the entire pizza (company). This means you are entitled to 1% of its future earnings and have a 1% claim on its assets. The more profitable the business becomes—the tastier the pizza gets—the more valuable your slice becomes. This concept of proportional ownership is the bedrock of investing in stocks. You are not betting on a squiggly line; you are buying a stake in a real, operating business.

Being a part-owner isn't a passive role. Ordinary shares typically come with voting rights. This gives you, the shareholder, a voice in key corporate matters. The most common vote is for the election of the company's Board of Directors, the group responsible for hiring and overseeing the management team that runs the company day-to-day. Shareholders may also vote on major decisions like mergers and acquisitions or changes to the corporate charter. While a small investor's vote may seem insignificant, collectively, shareholders wield the ultimate power. This right reinforces the value investing mindset: you are an owner with a vested interest in the company's long-term stewardship and success.

As an owner, you benefit when the company does well. These rewards generally come in two forms:

• Capital Appreciation: This is the increase in the share's market price over time. A value investor's goal is to buy shares when they trade below the company's true Intrinsic Value. As the business grows, executes its strategy, and increases its earnings, its intrinsic value rises, and the market price eventually follows suit. This growth in your initial investment is known as Capital Appreciation.
• Dividends: When a company earns a profit, it can choose to reinvest it back into the business for future growth or distribute a portion of it directly to its owners (shareholders) as cash. This payment is a Dividend. It's a tangible, real-money return on your investment and a hallmark of many mature, stable companies.

With great potential reward comes significant risk. As an ordinary shareholder, you're last in line. If the company fails and goes into Liquidation, it must first pay off all its debts to Creditors (like banks and bondholders) and any preference shareholders. Whatever is left over—if anything—is distributed among the ordinary shareholders. In many bankruptcies, this amounts to zero. This is the ultimate risk of ownership. Your investment is also subject to market Volatility. Share prices can swing wildly based on news, sentiment, or the manic-depressive mood swings of what Benjamin Graham famously called Mr. Market. However, a true value investor sees this volatility not as a risk, but as an opportunity to buy great businesses from a pessimistic market at a discounted price. It's also important to remember that as a shareholder, you benefit from Limited Liability—the most you can possibly lose is the amount you invested. The company's creditors can't come after your personal assets.

To a value investor, an ordinary share is not a lottery ticket. It is a legally recognized certificate of partnership in an enterprise. We don't get excited by short-term price jumps; we get excited by a company's growing earnings power, strong competitive advantages, and honest management. As the legendary investor Warren Buffett advises, you should only buy a stock if you'd be comfortable holding it even if the stock market shut down for ten years. The focus is always on the long-term performance of the underlying business, not the fleeting popularity of its stock.

The entire philosophy of value investing revolves around a simple but powerful idea: buy a thing for less than it's worth. With ordinary shares, our job is to meticulously analyze a business to estimate its intrinsic value and then wait patiently for the market to offer us its shares at a significant discount to that value. This discount is our Margin of Safety, the buffer that protects us from bad luck or errors in judgment. The ordinary share is simply the tool we use to act on that analysis, allowing us to partner with great businesses and watch our capital compound over time.