​Investment - Introduction to Equity Securities 
Companies may issue numerous types of equity securities. The types of equity instruments, or equity-like securities, that firms generally issue include common stock (sometimes called common shares or ordinary shares) and preferred stock (or preferred shares). Another sort of equity asset, depositary receipts, are not issued by a firm, but they provide the holder an equity interest in the company. Let’s review the features of equity securities.  

Features of Equity Securities
Each sort of equity security has unique properties, as detailed in the table below. Most equity instruments are issued without a maturity date (infinite life), may or may not have a stated par value (or face value), come with cash flow rights, and come with voting rights if they are common shares. 

Shareholders having voting rights collectively elect a group of persons, called the board of directors, whose role it is to supervise the company’s business activities on behalf of its shareholders because shareholders do not often engage in the day-to-day management decisions of major corporations. 

The board of directors is responsible for appointing the company’s senior management (e.g., chief executive officer and chief operating officer), who handle the company’s day-to-day business operations. But choices of considerable importance, such as the decision to acquire another company, normally require the majority approval of shareholders with voting rights.  

Features of Equity Securities

Life Most equity instruments are issued with an unlimited life, while some may be issued with a maturity date.

Par Value
Equity securities may or may not be issued with a par value, which is the security’s stated value, or face value.

Voting Rights
Some equity securities, such as common shares, allow their holders the power to vote on specific subjects.

Cash Flow Rights
 Equity shares offer their holders the right to distributions, such as dividends, paid by the corporation. Preferred shares give an explicit annual dividend rate.

Equity securities come with cash flow rights – the right to receive payments, such as dividends, made by the corporation. In the case of the corporation being liquidated, assets are allocated following a priority of claims.

Common Stock 

Common stock is the principal type of equity investment issued by firms. A common share signifies an ownership position in a firm. Common shares normally have an endless life; in other words, they are issued without maturity dates. 

Common stock may or may not be issued with a par value. When common shares are issued with par values, firms generally set their par value extremely low, such as 1 penny per share in the United States. It is crucial to remember that the par value of a common share may have no connection to its market value, even at the time of issue. For instance, a common share having a par value of 1 cent may be issued to a shareholder for USD50.  

Common shares comprise the biggest component of equity securities by market value. Large corporations often have numerous common owners, each of whom normally holds a very small part of the company’s total shares. Private corporations are often significantly smaller than public companies, and their shares typically do not trade on stock exchanges.

Investors may own common stock of public or private companies. 

Shares of public corporations often trade on stock exchanges that facilitate trading of shares between buyers and sellers. The ability to sell common shares of public firms on stock exchanges affords shareholders the benefit of liquidity - the opportunity to trade when they want to trade and at a reasonable price.  

Companies may pay out a portion of their profits each year to their shareholders as dividends; the rights to such payments are the shareholders’ cash flow rights. Dividends are normally issued by the board of directors and vary according to the company’s performance, its reinvestment needs, and the management’s attitude on paying dividends. As owners of the underlying corporation, common shareholders participate in the performance of the company and have a residual claim on the company’s liquidated assets after all liabilities (debts) and other claims with higher seniority have been paid.  

In terms of voting rights, many corporations have a single class of common stock and follow the rule of ‘one share, one vote’. But some corporations may issue several classes of common stock that give varying cash flow and voting rights. In general, an arrangement in which a corporation sells two classes of common stock (e.g., Class A and Class B) typically provides one class of shareholders — generally the company’s founding members — with superior voting and/or cash flow rights.  

The reason for having numerous share classes is frequently that the company’s original owner wants to keep control, as measured by voting power, while also offering cash flow rights to attract shareholders.   

In financial markets, the firms issuing common shares are often categorized by two key company characteristics: 

Firm size, as defined by market capitalization (total market value of the company’s common stock)

Investment style (value or growth)

With respect to size, corporations are often classed as either small-cap (market capitalisation under USD2 billion), mid-sized (market cap between USD2 billion and USD10 billion), or large-cap (market cap larger than USD10 billion). In terms of style, value stocks tend to be linked with older, established companies with predicted low growth in future revenues and earnings. In contrast, growth firms tend to be younger organizations with predicted stronger growth in future revenues and earnings.  

Preferred Stock  
Companies may also issue preferred stock (also known as preferred shares or preference shares). These shares are named preferred because owners of preferred stock get dividends before common stockholders. If the company ceases operations, they also have a larger claim on the company’s assets compared with common shareholders. In other words, preferred stockholders receive preferential treatment in some areas. But preferred shareholders are often not entitled to voting rights.  

Preferred shares provide an annual set dividend to investors. The annual dividend amount is equal to the product of the stated dividend rate and the stated par value. The annual dividend is normally paid in two payments

(semiannually) or in four payments (quarterly). Unlike the par values for common stock that are often close to nothing, the par values of preferred shares are substantial sums because they are a determinant of the annual dividend payment. 

The par value of a preferred share also often symbolizes the amount the shareholder would be entitled to receive after a liquidation, as long as there are sufficient assets to fulfill the claim.

Although the annual dividend rate is explicitly mentioned, there is no legal duty of the firm to pay it in a particular year. For example, the board of a corporation with bad performance in a particular year may chose not to pay preferred dividends. Preferred shares differ with respect to the policy on missed dividends, depending on whether the preferred stock is cumulative or non-cumulative. Cumulative preferred stock demands that the corporation pay in full any missed dividends to preferred owners before paying dividends to common shareholders. In comparison, non-cumulative preferred stock does not demand that missed dividends be paid before dividends are paid to common shareholders. 

Preferred share conditions may provide the issuing firm with the opportunity to purchase back, or redeem, the preferred stock from shareholders at a pre-specified price, referred to as the redemption price. In general, the pre-specified redemption price is equal to the par value.  

Some corporations have more than a single issue of preferred stock. Multiple preferred stock offerings are referred to by series. Each preferred stock series issued by a corporation normally carries its own yearly dividend rate, and they may differ with respect to other attributes as well.  

Depositary Receipts  
A depositary receipt is a security reflecting an economic stake in a foreign corporation, and trades like a common share on a local stock exchange. 

For investors buying shares of foreign companies, the transaction costs involved with obtaining depositary receipts are much lower than the costs of directly purchasing the stock on a foreign country’s stock exchange. Depositary receipts are issued by financial institutions, not by the corporation, and do not raise money for the company.

A custodian financial institution located in the domestic country buys the shares in the foreign country, holds them in custody, issues depositary receipts against the shares held, and sells the depositary receipts to domestic investors who can trade them on the local stock exchange. Consequently, depositary receipts permit trading of a firm’s stock in nations other than the one where the company is listed. In essence, depository receipts make the process of investing in international corporations easier for local market investors.  

Depositary receipts are typically referred to as global depositary receipts (GDRs) but may be designated by different names in different nations. In the United States, GDRs are known as American Depositary Receipts (ADRs) or American depositary shares. 

The following are other properties of depositary receipts:

Generally similar globally but may vary somewhat because of differing legislation
Have no maturity date like the shares they are based on (i.e., they have an unlimited existence)
May or may not offer their owners any voting rights even if they effectively represent common stock ownership; in such situations, the custodian financial institution may maintain the voting rights linked with the shares