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47 Overview of Equity Securities (Classification of equity securities…
47 Overview of Equity Securities
Classification of equity securities
common shares
callable common shares
putable common shares
preference shares
features of common stock
features of debt
the dividends are fixed
do not have any voting rights
cumulative preference shares
participating preference shares
receive the standard preferred dividend plus the opportunity to receive an additional dividend
convertible preference shares
Private Equity Securities
issued primarily to institutional investors via non-public offerings
characteristics
liquidity is lower
share price is negotiated by two parties
the financial disclosure will be less transparent
low reporting cost
corporate governance is generally weak
less pressure for short-term performance
gain superior return when the firm launches IPO
types
venture capital
provide seed or start-up capital
leveraged buyout (LBO)
uses a large amount of debt to purchase all of the outstanding common shares of a publicly traded company
the investors are management of the target company
MOB
private investment in public equity (PIPE)
sell a sizable share to private investors
Non-domestic Equity Securities
direct investing
buying a foreign firm's securities in foreign market directly
global registered shares
traded on different stock exchanges all over the world in different currencies
depository receipts
represents an economic interest in a foreign company
global depository receipts (GDRs)
issued in any countries other than U.S. or the issuer's home country
american depository receipts (ADRs)
traded within the United States in US dollars
basket of listed depository receipts
an exchange-traded fund (ETF) that represents a portfolio of depository receipts
Risk and Return of Equity Securities
equity returns
dividends
capital gains or losses
foreign exchange gains or losses
equity risk
Preferred stock contains less risk comparing to common stock
Putable shares contains less ris for investor
Callable shares contains more risk for investor
return on equity
determine whether the management of a company is effectively and efficiently using the capital they have provided to generate profits
cost of equity
the investor's minimum required rate of return