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How to calculate the Book Value of an Ordinary Share?
What are Ordinary Shares?
Ordinary shares are tools that provide the investors the ownership rights to a company. There are two types of shares available for purchase −
Ordinary Shares
Preference Shares
Preference shares are treated before the ordinary shares in case a company goes into liquidation.
Attributes of Ordinary Shares
Investors can buy or sell ordinary shares anytime they wish in the share market. The share market is therefore the trading hub of ordinary shares and the shares of all listed companies are traded in the markets.
Ordinary shares are the source of permanent capital for a company.
Ordinary shares do not have a maturity date.
The price of ordinary shares depends on the demand and supply of the shares in the market. If demand is more than supply, the prices go up. If the supply is more than the demand the prices go down.
Ordinary shareholders are entitled to dividends when there is a net profit earned by the company. However, the rate of dividend payout is not fixed and it is often randomly distributed. That is why, ordinary shares are also called variable income security.
Book Value of an Ordinary Share
The total sum of capital represented by ordinary shares is called Equity Share Capital.
The Authorized Share Capital (ASC) is the maximum amount of capital a company can raise from the shareholders. These shareholders can be ordinary or preferred.
The portion of ASC offered to the shareholders is known as Issued Share Capital.
The portion of capital that has been subscribed by shareholders from the Issued Share Capital is known as the Subscribed Share Capital.
The amount of total capital that has been raised by Subscribed Share Capital is known as Paid-up Share Capital.
The extra amount of money or premium that is paid to shareholders along with the equity share capital is known as the Share Premium.
The money retained by the company from the net earnings that is not paid to the shareholders is known as the Reserves and Surplus.
The total of Paid-up capital, Share Premium, Reserves and Surplus is known as the Net Worth of the Share.
The Book Value of a share is calculated by dividing the Net Worth by the total outstanding number of shares.
The Book Value of a share is calculated by dividing the Net Worth by the total outstanding number of shares.
$$\mathrm{Book\: Value \:of \:a\: Share\:=\:\frac{Net\: Worth \:of \:the\: Share}{Total \:Outstanding\: Number\: of\: Shares}} $$
Therefore, the Book Value of shares depends on the given three factors (i.e., Paid-up capital, Premium, and Reserves and Surplus) and the total number of shares in the market.
Conclusion
Ordinary shares make up for the biggest chunk of ownership of a company that is held by a large number of shareholders. Therefore, when we hear about the shareholding patterns, it is often related to ordinary shares rather than preference shares or other forms of securities.
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