SIE for Dummies: Equity Securities

2025-2026

Common Stock

Corporations issue this to raise business capital (money). This is an equity security.

Equity Security

Represents ownership of the issuing corporation.

Market Value of Common Stock

Value based on the worth (or perceived worth) of the company - how many shares are outstanding, supply and demand, etc.

Right of Inspection

Stockholders have the right to inspect some books and records of the issuer, including a list of stockholders and minutes of stockholders’ meetings. This info is typically available through an audited annual report.

Limited liability

Stockholders’ liability is limited to the amount invested, you lose only what you invested.

Order of Liquidation

If a corporation goes bankrupt, it must distribute any remaining assets in the order of 1) unpaid workers, 2) the IRS, 3) secured creditors, 4) general creditors, 5) subordinated debentures, 6) preferred stockholders, 7) common stockholders.

Secured Creditors

Creditors that have issued loans that are secured with collateral, bonds, etc.

General Creditors

Creditors that have issued unsecured loans without any collateral (bank loans, accounts payable, debentures, etc.)

Debentures

Medium- to long-term unsecured debt instruments issued by corporations and governments to raise capital

Subordinated Debentures

Junior unsecured bonds, holders are the last creditors paid in event of bankruptcy.

Residual Rights

Common stockholders have this right that means they’re the last to get paid in the event of corporate bankruptcy.

Senior Securities

Bonds and preferred stock are considered … in relation to common stock.

Voting Rights

One right of most common stockholders, most preferred stock does not have this right. Corporations may have investors vote to change members of the board of directors. Can also vote on other issues such as stock splits.

Nonvoting Stock

Sometimes companies will issue … in rare circumstances to protect their board of directors. Most preferred stocks are this.

Vote by Proxy

Absentee ballot because having all stockholders attend annual corporate meetings to vote would be difficult.

Statutory (Regular) Voting

Most common type of voting. Investors receive one vote for every share they own, multiplied by the number of positions to be filled on the board of directors (or issues to be decided). Investors have to split the votes evenly for each item on the ballot. Investors vote yes or no for each candidate.

Cumulative Voting

Investor still get same number of overall votes as statutory voting (# of shares * open board positions/issues to be voted on), but can vote shares in any way they see fit. Gives smaller shareholders (in terms of shares) an easier way to gain representation on board of directors by voting more votes to one/a few people they support.

Buy more shares

The only way to get more voting power is to …

Transfer Agent

Responsible for sending out proxies.

Proxy Fight/Battle

Unfriendly event that occurs when a group of stockholders of a corporation decide to vote together to gain control of the corporation. Usually happens when stockholders aren’t happy with the way the corporation is being run. Trying to replace board members or people in management.

Authorized Shares

Number of shares of stock a corporation can issue. Issuer’s bylaws or corporate charter states the number of shares the company is authorized to sell. Issuer usually holds back a large percentage of this, which it can sell later as needed through primary offering. If the issuer wishes to sell more shares than authorized, the corporate charter must be updated, which requires a vote by stockholders.

Issued Shares

Portion of authorized shares that issuer has actually sold to the public, including shares owned by founding shareholders.

Unissued Shares

Portion of authorized shares that hasn’t been issued to the public. Do not carry rights and privileges of issued shares.

Shelf Registration

SEC Rule 415 - shares may be kept unissued for up to two or three years.

Outstanding Shares

Number of shares in investors’ hands. May or may not be the same number as issued shares. Outstanding = issued - treasury.

Treasury Stock

Stock that issuer repurchases from outstanding shares. This may be to help increase demand (and the price) of the stock, avoid a hostile takeover, etc.

Hostile Takeover

Another company is trying to gain control of the issuer.

Par Value of Common Stock

Nominal/original value of this stock is more or less a bookkeeping value for the issuer. May set par value at $1, market price is usually much more. Par value has NO relationship with market price. Some issue stock with no par value.

Additional Paid-In Capital

aka Paid-in Surplus/Capital in excess of par. Amount over par value that an issuer receives for selling stock.

Stated Par Value

This value is printed on the stock certificate; may change as result of corporate actions such as stock split.

No Par Value Stock

Stock issued without a stated par value. Stock has stated value that corporations use for bookkeeping purposes. Lack of par value doesn’t affect investors.

Buybacks

A cash-rich corporation repurchases some of its own shares, turning them into treasury stock. Increase market value of security, fewer shares are outstanding.

Tender Offer

When a corporation, person, or group attempts to gain control (make a takeover bid) of a corporation (the target corporation). Typically announced in financial publications, and the offer will be at a premium to market value of the securities. Good for specified period and specified minimum number of holders of shares (holders of more than 50% of the outstanding shares of target corporation) must agree; otherwise, the offer is cancelled. Increase market price of securities being targeted.

Exchange Offers

Corporation exchanges some of its securities for other ones. May offer bondholders the right to exchange certain debt securities for stock to reduce corporation’s debt. May offers to exchange 4% bonds due to mature in 2 years with 5% bonds due to mature in 20 years, extending the time the corporation has to pay back its debt.

Mergers

Two existing corporations merge themselves, often to gain market share, expand one corporation’s reach, or expand into new segments. Typically have a positive impact on investors.

Acquisitions

A larger corporation takes control of a smaller one or a portion of another corporation. It must obtain majority ownership of the target corporation to acquire another.

Investors of the securities must be notified

In the event of a corporate action (ex. Stock split, M&A, etc.), …. For public companies, the exchanges handle notification and make information available online. If securities trade OTC, FINRA is responsible for handling announcements.

Round Lot

Normal unit of trading at 100 shares of stock.

Splitting common stock

Show investors their company is growing. Makes the market price of the security more attractive, if the share price gets too high, the number of investors who can purchase it becomes limited. Stockholders can vote on this. Investors may have more or fewer votes, but still hold the same percentage of votes. The number of authorized shares needs to be changed on corporate charter.

Reverse-Split

aka Reverse Stock Split. Consolidating shares to raise the price of the stock and perhaps to keep price from dropping too low and possibly face being delisted; may make potential investors think there’s a problem. Investors usually have to send old shares to a transfer agent to receive new shares. Can use the same formulas for calculating shares and price after a split.

Forward Stock Split

aka Simple Split. The number of shares increases, price decreases without affecting total market value of outstanding shares. Investors receive additional shares, but market price (and par value) per share drops. May be even (#-for-1) or uneven (3-for-2, 5-for-3, etc.).

Shares after a Split

shares * (A/B); A = first number, B = second number

Price after a Split

stock price * (B/A); A = first number, B = second number

Pro Rata Share of Dividends

If and when the corporation declares a dividend, each shareholder is entitled to an equal proportion for each share that they own. Investors can receive dividends in cash, stock, or property forms.

Property Forms

Stock of a subsidiary company or sample products made by the issuer.

Paying Dividends

Investors can’t vote on dividends, the board of directors decides dividend payouts. Even profitable companies may not pay cash dividends because they may want to reinvest profits back into the company.

Cash Dividends

A way for a corporation to share its profits with shareholders. This payout is a taxable event when the investor receives it. Good incentive for investors to hold onto stock that isn’t experiencing much growth, not required. Market price of stock falls on the ex-dividend date to reflect the dividend to be paid on the payment date announced.

Ex-Dividend Date

First day the stock trades without a dividend

Price on ex-dividend date

Stock price - dividend =

Stock Dividends

Just like forward stock splits in that the investor receives more shares of stock, but the corporation offers a percentage dividend instead of 2-for-1, etc. Aren’t taxable to the stockholder because the investor’s overall value of investment doesn’t change. Primary reason to give this is to make the market price more attractive to investors thus adding liquidity to the stock. Ex. 400 shares at $33; 10% dividend; 440 shares at $30.

Liquidity

Ease of trading.

Corporate Action Effects

When a security is subjective to corporate actions, it’s going to change. In some cases (forward stock splits, stock dividends), receive more shares at lower cost basis, and the cost basis of the shares held will be lowered accordingly. The adjustment to the cost basis is important for tax purposes when determining the amount of capital gain or losses.

Preferred Stock

aka Preferreds. Has characteristics of both equity and debt securities. Equity security because it represents ownership of the issuing corporation the same way common stock does. Somewhat like debt securities receiving interest but consistent dividends in this case. So, many are rated by rating agencies such as Mooday’s, Standard & Poor’s, and Fitch. Generally has a par value of $100 per share and tends to trade in the market much closer to its par value than common stock does.

Preferred Stock Advantages

Receive money back (if any is left) before common stockholders do if the issuer reorganizes. Issuers of preferred stock typically pay consistent cash dividends unless profits are lagging or losing money.

Preferred Stock Drawbacks

Lack of voting rights, sometimes higher cost per share, lack of growth. Don’t receive voting rights unless they fail to receive their expected dividends. Because most pay consistent dividends, the market price will increase or decrease depending on prevailing interest rates similar to debt securities.

Preferred Stock Dividend

Based on par value. % preferred stock dividend * $100 par = $ per year in dividends. (Divide answer by payment schedule to get the amount each payment).

Noncumulative (straight) Preferred

Rare. If an issuer fails to pay a dividend, the issuer doesn’t owe it to investors. May choose this relative to common stock, because if they pay dividend they get it before common stock and if bankruptcy they get paid before common stock. Riskier for investors so typically offer a higher dividend.

Cumulative Preferred

More common. If an investor doesn’t receive an expected dividend, the issuer is in arrears and still owes that dividend. Before paying a common dividend, the issuer first has to make up all delinquent payments to cumulative preferred stockholders, then other preferred shareholders, then common stockholders. This is safer than noncumulative.

Convertible Preferred

Allows investors to exchange preferred stock for common stock of the same company at any time. Because there’s another way to make money, usually receive lower dividend payment than nonconvertible. Typically trades very close to the parity price.

Conversion Price

Dollar price at which a convertible preferred stock par value can be exchanged for a share of common stock. When convertible preferred stock is first issued, this is specified based on preferred’s par value.

Conversion Ratio

Number of shares of common stock that an investor receives for converting one share of preferred stock. = Par Value / Conversion Price. Helps determine parity price.

Parity Price

Price at which convertible preferred stock and common stock would be trading equally. If there’s disparity, converting may be profitable.

Callable Preferred

Allows issuer to buy back preferred stock at any time after a defined date at the price (call price) on the certificate. Riskier because investors don’t have control of how long they can hold the stock, so corporations usually pay a higher dividend on callable preferred stock than regular. The call feature may be added, ex. Callable convertible preferred.

Prior (senior) Preferred

Preferred stockholders receive compensation before common in bankruptcy. These receive compensation even before other preferred stockholders. Pays slightly lower dividend than other preferreds from the same issuer.

Adjustable (variable/floating-rate) Preferred

Holders receive a dividend that reset every three months to match movements in prevailing interest rates (usually based on certain benchmarks such as T-bill rate), stock price remains more stable.

American Depository Receipts (ADRs)

Receipts for foreign securities traded in the US. Negotiable certificates that represent a specific number of shares (usually, one to ten) of a foreign stock. In many cases, investors don’t have voting privileges because shares are held by the bank. In some cases, holders may be able to give voting instructions to the bank to vote on their behalf. US banks issue these stock certificates; investors receive dividends in US dollars. Certificates are held in a foreign branch of a US bank (custodian bank). To exchange for actual shares, investors return this to the bank. *Currency risk.

Negotiable Certificates

Can be sold or transferred to another party.

Currency Risk

Risk that the value of the security may decline because the value of the currency of the issuing corporation may fall in relation to the US dollar.

Rights

Special privileges. Subscription or preemptive to their common stockholders. Allow existing stockholders to purchase new shares of the corporation at a fixed discounted price directly from the issuer, before the shares are offered to the public. One of these for each share they own. Short-term - usually 16 to 30 days, some up to 60. Marketable. Assume common stockholders automatically receive this.

Marketable

Stockholders may sell them to other investors.

Standby Underwriter

Broker-dealer that purchases any shares that weren’t sold in the rights offering and resells them to other investors.

Warrants

Certificates that entitle the holder to buy a specific amount of stock at a fixed price and are usually issued along with a new bond, preferred stock, or other securities offering. No voting rights and receive no dividends. Long-term and sometimes perpetual (without expiration date). Sweeteners. When issued, the exercise price is set well above the underlying stock’s market price.

Units

Bundled bonds and warrants or bundled stock and warrants.

Sweeteners

Can also be sold separately just like any other marketable security.

Exercise Price

Price at which investor can utilize the warrant to buy the stock.

Derivative Securities

Rights and warrants because their value is derived from the value of an underlying security (common stock).