Wednesday 22nd of July 2015
Cds day. AAh!, day of rest. Left home early, because on our group chat we were to visit a school today in order to donate books to their library. So I left my house by 7:35 and got there by 8:15,only to meet only one person waiting there, while I was expecting the local government inspector and all my Cds members’. I was really disappointed.
I thought to myself, instead of me to still be enjoying my sleep, rolling on my bed, I am here waiting for everyone to come. Finally they arrived at around 10am or so, and then we left for the school; Only to arrive there two minutes later. Like seriously? I left early for that? O my God!!, when it was just a stone throw from our Local government.
We met the principal there and donated the books, took pictures and he prayed for us.
Getting tired of this daily reading and posting business, So posts might be coming weekly or on three days interval of at my discretion and it might also come without the recap of my day. So I read briefly on equities.
Here it goes:
What are Equities?
Equities are investments with higher returns than fixed interest investments such as bonds or treasury bills. They can earn unlimited amount or percentage of returns but the downside to it is that it possesses a higher risk.
Common shares are a type of equity, it is the most invested type of equity, and ordinary people such as you and I invest in common shares. It represents ownership interests. They are called the owners of the business, and they have a residual claim on the firm’s assets in a case of liquidation.
The firm has no obligation to pay dividends on common equity, this is done at the discretion of the management, so far the company makes profit. A percentage of earnings after settling debts and taxes may be paid out as dividends, with the remaining added up to form retained earnings.
Common shareholders have voting rights on issues concerning the company. They can vote on matters ranging from the appointment of directors to the appointment of auditors or merger decisions. They are two types of voting systems for common shareholders; they are the statutory voting system and cumulative voting system.
In the statutory voting system each share held is assigned one vote in the election of members of the board of directors. This means that the higher the number of shares you have, the higher your say in the affairs of the company. So if a shareholder has 100 shares, she receives 100 votes. This type of voting system gives the individual and company with more equity a greater voice in the company’s decision making. The thing about statutory voting is that votes have to be evenly. For example when voting for 4 positions in the board, and you own 50 shares, you could cast 50 votes for each member for a total of 200 votes.
The Cumulative voting system also allows shareholder’s vote proportionately to the number of shares they hold e.g 100 shares receives 100 votes; although, unlike the statutory voting system, a shareholder is not mandated to distribute his votes evenly. A shareholder could weigh their votes towards a particular candidate, he can distribute it any how he pleases. If he so desires, he can send all his votes to a particular candidate while ignoring others. This gives voice to minority shareholders and gives them a chance of influencing the votes.
Callable Shares
They are callable shares and putable common shares. Callable common shares give the firm the right to buy the shares back at a pre-specified call price. This can be an advantage to the firm because if there is a situation where the market price exceeds the call price, a firm can demand for its shares and pay the call price while they resell it at the market price and make gains.
Putable common shares give the shareholders the right to sell the shares back to the firm at a specific price. This can be at an advantage to the shareholders because in a situation where the market price falls below the put price, the shareholder can sell it back to the firm at the put price and thereby hedge a loss that could have ensued.
Preference shares
Preference shares are like hybrid investments because they have features of both common stock and debts. Unlike debentures and other debts, preference shares are not a contractual obligation. The shares usually do not mature and the shares have a put or call feature. Preference shares have a fixed rate of return like debts, and they do not have voting rights.
Types of preference shares
Cumulative preference shares: As the name implies, is cumulative and it adds up in the case of a default in payment, when earnings become available, payments owed must be paid alongside payment for the period before common shareholders receive dividends.
Non cumulative preference shares: These are preference shares that do not carry over defaults in payment. That means dividends not paid would be lost, but dividends for the current period must be paid before common shareholders can receive dividends.
Participating Preference shares: These are shares that receive extra dividends if firm’s profit exceeds a predetermined level and they may receive a value greater than par value of the preferred stock if the firm is liquidated.
Non participating preference shares: Non participating preference shares do not receive extra dividends if the firms profit exceeds a predetermined level. In the event of liquidation they have a claim equal to the par value.
Convertible preference shares: These are shares that can be exchanged for common stock as at a rate already predetermined by the company.
Recommended Reading
Frank Fabozzi., Financial management and analysis
