Common Equity Instruments
Common Stock
The most universal instrument is common stock or ordinary shares giving the holder the right to vote on company policy matters.
Preferred Stock
Preferred stock generally does not carry voting rights but may have priority over common stock on dividend payments and upon liquidation of the business. Preferred stock often has a convertibility feature into common stock and is issued to investors if a business needs to raise capital over a fixed time horizon or for a specific use.
Examples of Complex Equity Instruments
Equity Options
There are two types of equity options: calls and puts. A call option gives its holder the right to buy an underlying security, whereas a put option conveys the right to sell an underlying security.
Equity Warrants
Warrants give the holder the right to purchase securities from an issuer at a specific price over a time frame. Warrants are often bundled with debt as a premium or “sweetener” to excite investors and are extensively used in private equity deals.
Equity Hybrids
The most common equity hybrid is the convertible bond which will give the holder the option to convert the bond to common stock at an agreed price in the future.
Exchange Traded Funds – ETFs
Exchange traded funds trade like stocks on an exchange but are a basket of like instruments designed to perform as an index. For example, one single ETF may represent all real estate firms on the exchange.
Equity Swaps
An equity swap is an interchange of future cash flows. The two flows are referred to as legs where one leg is pegged to a floating rate and the other, known as the equity leg is based on performance. Swaps allow investors to gain a minimum performance from their investments.
