Types of equity and Issuing shares

There are following types of equities that can be issues by a company:

Common stock / shares : The owner of common stock are the owners of small portion of the company and they have the voting rights in the company like in selection of board of directors. However they can’t interfere in day to day functioning of the company. In case of liquidation of the company they are the last to be paid.

Preference Stock: preference stocks are more akin to bonds than common equity because certain fixed dividend has to be paid to preferred stock holder by the issuer. The owner of the preffered stock don’t have voting rights however in case of liquidation they get preference of common stock holder. preffered stock is preffered over bonds because of the tax savings on the dividends.

convertible preffered stock: These stocks can be converted into common equity at predetermined price during a fixed period. These are similar to convertible bonds.

Warrants: Warrants give the holder the opportunity to purchase the common equity of the company during certain period of time at predetermined price. This predetermined price is known as strike price or exercise price. The tangible value of the warrant is the market price less strike price. If tangible price is 0 or less than 0 then the holder doesn’t exercise the option becuase investor can purchse the stock in market at lesser price.

Issuing Shares

Following are the ways to issue the shares / stock :

InitialPublic Offering (IPO) :  When a company raise the capital from the public for the first time through common stock,  it is called Initial Public offering.

Secondary offering : When a company whose common stock already exists in the market issues the equity again, it is called secodary offering. It included follow on offers and rights issue. In rights issue, the common stock is issued to existing shareholder at certain fixed proportion and the shareholder can transfer his rights to anyother person for purchasing the same.

Private Placement: In private placements, stocks are issued to certain big private investors, wealthy individuals etc and they can’t trade thse stocks in secondary market. However they have the rights of voting for selecting the board of directors.

~ by rishabhjain1601 on July 1, 2009.