Chapter 7. Types of securities: equity securities

In this chapter we will look at types of securities. First, let us consider the meaning of the term “security”. A security is a special commodity traded on its own special securities market. This commodity has no monetary or tangible use value, which means that it is neither a service nor a physical commodity.

 

Each security, or rather their market form and economic essence, can be viewed simultaneously from several points of view. This predetermines the possibility to classify securities according to various characteristics. Each security has its own unique characteristics, which allow you to effectively form portfolios and competently adhere to investment strategies. The following types of securities are generally accepted: equity and debt.

In this chapter we will consider the main representatives of equity securities. An equity security determines the investor’s share in some capital, enterprise, project, etc. Shares are equity securities.

A share is a representative of a type of securities, by means of which its owner (called a shareholder) receives a share in a company (issuer) and becomes its “co-owner”. Shares can give the right to receive profits in the form of dividends and participate in the management of the company. When buying shares, the investor is entered into the register of shareholders. It should be said that by buying shares, the investor exposes his capital to some risk, because if the company suddenly goes badly, the value of shares will decrease, which may lead to the loss of all the invested money in full or in part.

Within our consideration of types of securities, all shares represent ownership of the issuing company, with each share representing an equal part of that ownership. Shares are divided into two types: common stock and preferred stock.

Ordinary shares (their holders) receive voting rights that can be exercised at shareholder meetings. But they have a lower priority in receiving dividends than preferred shares. In addition, the shareholders’ meeting (or the board of directors) may decide to allocate profits for expansion of production, as a result of which holders of ordinary shares will not receive dividends at all. It is the legal right of a joint stock company to make such a decision. Despite this, common shares have been and remain an extremely popular way to invest, with many financial institutions and millions of private investors using it.

Preferred shares (their owners) have no voting rights, however, as mentioned above – they receive the privileged right to receive dividends. If the joint-stock company has not paid dividends, then even then the owners of preferred shares get the right to vote. As a rule, the size of dividend payments on preferred shares is smaller than on ordinary shares, and they are cheaper. All their attractiveness for investment lies in regular payment of dividends. Investing in these shares is most often resorted to by those who are more interested in ensuring a sufficient level of current income than in maximizing profits.

Circulation of shares on the stock exchange is beneficial to everyone – both issuing companies and investors who bought the shares. Shareholders invest funds and receive income in the form of dividends and in the form of increase in the value of the share. In turn, issuers receive additional funds that can be invested in the realization of internal projects. At the same time, there is no need to worry about interest payments.

Thus, a share is such a security that makes the investor who bought it a shareholder (and therefore the owner of a share in the company) and allows to get profit. But this profit can be as big or not at all, because the market value (rate) of shares is constantly fluctuating. If the company is experiencing rapid growth, the investor can sell the share more expensive and get a significant profit. Well, and in a crisis situation, the share price will fall, and the investor will receive a loss. Therefore, the interest of most investors is attracted to the shares of large and stable companies that tend to grow.
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