EQUITY

SECURITIES
 Definition
Equity securities represent
ownership claims on a company’s net
assets. As an asset class, equity plays a
fundamental role in investment
analysis and portfolio management
because it represents a significant
portion of many individual and
institutional investment portfolios.
 FOUR TYPES OF
EQUITY SECURITIES
1. Common Stock

The most common sort of equity asset issued by firms is common stock. These are
also known as common shares, ordinary shares, or voting shares. A common share is a
company’s ownership interest. Common shares are issued with no maturity dates and have
an indefinite life. A par value may or may not be assigned to common stock. Large
corporations frequently have a large number of common owners. Each of these owners
holds a part of the company’s total shares. Investors can purchase common stock in both
public and private companies. Shares of publicly traded corporations are often traded on
stock exchanges, which facilitate share trading between buyers and sellers. Private
corporations are often significantly smaller than public corporations, and their stock does
not trade on stock markets. The capacity to sell common shares of public corporations on
stock exchanges allows potential shareholders to trade when and at what price they desire.
 FOUR TYPES OF
2. Preferred Stock EQUITY SECURITIES
Businesses may also issue preferred stock (also known as preferred
shares or preference shares). Preferred stocks are hybrid securities because
they have the characteristics of both debt and equity investments.
Preference stockholders have both benefits and drawbacks. On the plus
side, they receive dividend payments before common stock shareholders. On
the other hand, they do not have the voting rights that regular shareholders
possess.
As a result, preferred stockholders typically receive dividends before
common stockholders. They also have a stronger claim on the company’s
assets than common shareholders if the company goes bankrupt. In other
words, preferred shareholders get special treatment in various ways.
 FOUR TYPES OF
EQUITY SECURITIES
3. Convertible bonds
Companies may issue convertible bonds to raise finance. A convertible
bond is a bond issued by a firm that allows the bondholder to convert the
bond into a set number of common shares. Although a convertible bond is
debt security prior to conversion, the fact that it can be converted to common
shares makes its value partially dependent on common share prices.
Convertible bonds are so classified as hybrid securities. Hybrid securities
combine the characteristics and linkages of equity and debt securities.
 FOUR TYPES OF
EQUITY SECURITIES
3. Convertible bonds
The conversion ratio is the number of common shares that the bondholder
will get after converting the bond. The conversion ratio may remain constant throughout
the life of the security, or it may change over time. A convertible bond’s conversion value
(or parity value) is the value of the bond if it is converted to common stock. The conversion
value equals the conversion ratio multiplied by the share price. The bonds are retired (no
longer exist) at the time of conversion, and common shares are issued.
Because the conversion feature benefits the bondholder, a convertible bond usually
has a lower fixed annual coupon rate than a comparable bond without a conversion feature
(a straight bond). Convertible bonds have an expiration date. If the bonds are not
converted to common stock before maturity, they will be paid off and retired like any other
bond on the maturity date.
 FOUR TYPES OF
EQUITY SECURITIES
4. Warrants
A warrant is equity-like security that entitles the holder to purchase a predetermined
amount of the issuing company’s common stock at a predetermined per-share price (called the
exercise price or strike price) prior to a predetermined expiration date. Warrants may be issued by a
corporation to investors to raise capital or to employees as a form of compensation. Warrant
holders may choose to exercise their rights before the expiration date.
A warrant holder will only exercise his or her right if the exercise price is equal to or less
than the price of a common share. Otherwise, buying the stock on the market would be less
expensive. When a warrant holder exercises his or her right, the corporation creates a certain
number of new shares and sells them to the warrant holder at the exercise price.
Warrants usually have expiration dates that are several years in the future. In rare situations, firms
will attach warrants to a bond or preferred stock issue to make the bond or preferred stock more
appealing. Warrants are known as sweeteners when issued in this manner. This is because their
inclusion often permits the issuer to provide a lower coupon rate (interest rate) on a bond issue or a
lower annual fixed dividend on a preferred stock issue.
 SHAREHODLER’S
EQUITY
Shareholders' equity is the residual interest in the assets of a corporation after
deducting all its liabilities. This is the equivalents of the "Owner's equity" in a sole
proprietorship and the aggregate of partners' capital balances in a partnership. The
components of the shareholders' equity include the following:
• Share capital (Capital stock)
• Preference share capital (Preferred stock)
• Ordinary share capital (Common stock)
• Subscribed share capital (Subscribed capital stock)
• Subscription receivable (as a deduction)
• Share dividends distributable (Stock dividends payable)
• Discount on share capital (as a deduction)
• Capital liquidated (as a deduction)
• Share premium (Additional paid-in capital)
• Retained earnings (appropriated and unappropriated)
 SHAREHODLER’S
EQUITY

Other components of equity

Revaluation surplus
Cumulative unrealized fair value gains/losses on FVOCI securities
Translation differences of foreign operations
Effective portion of cash flow hedges
 SHAREHODLER’S
EQUITY
 Authorized share capital represents the maximum number of shares fixed in the
entity's authorized articles incorporation that can be subscribed and issued
shareholders.
 Unissued share capital represents the portion of the authorized share capital not yet
issued and is still available for represents the portion of the subscription and
issuance.
 Subscription- a contract between the purchaser of shares G investor) and the issuer
(i.e., corporation) in which the purchaser promises to buy shares of the issuing
company's stocks.
 Subscription receivable- represents the unpaid portion of the subscription price.
Subscription receivable is presented as deduction from the related subscribed share
capital, i.e., cont equity account.
 Subscribed share capital represents the portion of the authorized share capital that
is subscribed but not yet issued.
 SHAREHODLER’S
EQUITY
 Share capital represents the portion of the authorized share capital that
is already issued.
 Share certificate is a document that evidences the ownership.
 Share issuance costs Bring shares entails expenditures, such as regulatory
fees legality accounting, and other professional fees, commissions and
underwriter's fees, printing costs of certificates, and documentary stamp
tax and other transaction taxes. These expenditures, called 'share
issuance costs, are deducted from any resulting share premium from the
issuance. If share premium is insufficient, the excess, is charged to
retained earnings.
 ORDINARY
SHARES
Ordinary shares (common stock) represent the residual corporate interest that
bears the ultimate risk of loss and receives the benefits of success. Ordinary
shareholders are guaranteed neither nor assets upon dissolution, but they generally
control the management of the corporation and tend to profit the most if dividends the
corporation is successful. If an entity has only one class of share capital, it necessarily is
an ordinary share capital. The Corporation Code prohibits the issuance of only
preference shares without ordinary shares. Ordinary shareholders with no preference ,
generally, enjoy the same rights over other shareholders.
The following are the four basic rights of ordinary shareholders:
• Right to attend and vote in shareholders' meetings
• Right to purchase additional shares (also known as preemptive right or stock right)
• Right to share in the corporate profits (also known as right dividends)
• Right to share in the net assets of the corporation upon liquidation
 PREFERENCE
SHARES
Preference shares (preferred stocks) are shares that give the holders thereof
certain preferences over other shareholders. Such preferences may include priority
claims over
(a) dividends and/or
(b) net assets of the corporation in the event of liquidation. In sacrifice
exchange for such preference(s), preference shareholders s certain inherent rights of
ordinary shareholders (e.g., voting rights over election of directors and officers). One
purpose of issuing preference share is to broaden investor appeal, thereby increasing the
corporation's opportunity to generate equity financing
Share premium
Share premium (additional paid-in capital) arises from various sources which
include the following:
a. Excess of subscription price over par value or stated value
b. Excess of reissuance price over cost of treasury shares issued.
c. Distribution of "small" stock dividends.
 TREASURY
SHARES
Treasury shares (treasury stocks) are an entity's own shares that
previously issued but are subsequently reacquired but not retired. Under the
Corporation Code, an entity may reacquire its previously issued shares only if
it has sufficient unrestricted retained earnings.
 Absolute valuation mainly analyzes the fundamentals of the company. It
estimates the company's past financial reports, operating performance, and the
company's forecast of future operating conditions, ultimately obtaining the
company's true intrinsic value. The absolute valuation method is reductive as
the analysis is focused on the characteristics of the company in isolation. There
is no comparison to its competitors in the same industry or complementary
sectors.
However, the process is problematic because competitive analysis is
important to assess the overall market movement in a particular sector.
Disruptive innovation due to new technology, major mergers and acquisitions,
regulatory change, new market entrants, or bankruptcy may impact the
trajectory of an entire sector.
 A relative valuation model is a business valuation method that
compares a company's value to that of its competitors or industry peers
to assess the firm's financial worth. Relative valuation models are an
alternative to absolute value models, which try to determine a company's
intrinsic worth based on its estimated future free cash flows discounted to
their present value, without any reference to another company or industry
average. Like absolute value models, investors may use relative
valuation models when determining whether a company's stock is a good
buy.
 Retained earnings represent the cumulative profits (net
of losses, distribution to owners, and other adjustments)
which are retained In the business and not yet distributed to
the shareholders.
Total retained earnings may consist of:
a. Unrestricted the portion of retained earnings that is
available for future distribution to the shareholders.
b. Appropriated (Restricted)- the portion of retained
earnings that is not available for distribution.
Distributions to shareholders are called dividends.

Dividends be in the form of:

1. Cash dividends-distributions in the form of cash.
Liability dividends - are dividends issued by a corporation that has a
temporary cash shortage. Liability dividend" may be either:
• Scrip dividends- short-term and may or may not bear
interest
• Bond dividends - long-term and bear interests
2. Property dividends - distributions in the form of noncash assets.
3. Share dividends - distributions in the form of the entity's own shares.
a. Date of declaration the date when the board of directors formally
announces the distribution of dividends.
b. Date of record the date on which the stock and transfer book of the
corporation is closed for registration. Only those who are listed as of
this date shall be entitled to receive dividends. Thus, it is only on this
date that the entity determines the exact amount of dividends to be
distributed on date of distribution. No entry is made on this date,
except when there a adjustments to the initially recognized amount of
dividend on date of declaration.
c. Date of distribution the date when the dividends declared are
distributed to the shareholders who are entitled to the dividends.
Thank You