Home  >  115 CFA  > Equity Investments - Reading 39 - 2. Types and Characteristics of Equity Securities

2. Types and Characteristics of Equity Securities

b. describe differences in voting rights and other ownership characteristics among different equity classes;

What are the two most important characteristics of common shares of equity? - Residual claim - the shareholders are the last in line of all those who have a claim on the assets or income of the corporation. - Limited liability - the greatest amount shareholders can lose in the event of the failure of the corporation is the original investment.

What is statutory voting (straight voting)? Statutory voting (straight voting) is a procedure of voting for a company’s directors in which each shareholder is entitled to one vote per share. If you have 100 shares you get 100 votes.

What is cumulative voting and why is it important? Cumulative voting is another procedure of voting for a company’s directors. Each shareholder is entitled to one vote per share times the number of directors to be elected. For example, if you owned 100 shares and there were three directors to be elected, you would have 300 votes. This is advantageous for individual investors because they can apply all of their votes toward one person.

All common shares can be callable and putable. What is the difference? - Callable common shares give the issuer the right to buy back the shares from shareholders at a pre-determined price. - Putable common shares give shareholders the right to sell the shares back to the issuer at a pre-determined price.

What is a preferred share (preference share)? - It promises to pay to its holder fixed dividends each year, like an infinite maturity (perpetuity) bond. - In the case of non-payment the company does not go bankrupt, but preferred shareholders have priority over common shareholders.

What are cumulative preferred dividends? Unpaid dividends accumulate and must be paid in full before any dividends may be paid to common shareholders.

What are dividends in arrears? All passed (unpaid) dividends on a cumulative stock are dividends in arrears. A stock which does not have this feature is known and noncumulative stock or straight preferred stock.

What are Participating preferred shares? Participating preferred shares offer the holders the opportunity to receive extra dividends if the company achieves some predetermined financial goals. Most preferred shares are non-participating.

What are Convertible preferred shares? Convertible preferred shares give the assurance of a fixed rate of return plus the opportunity for capital appreciation. The option to convert these preferred shares into common shares gives the investor the opportunity to gain from a rise in share price.