Defining equity instrument
An equity instrument refers to a document which serves as a legally applicable evidence of the ownership right in a firm, like a share certificate. Equity instruments are, generally, issued to company shareholders and are used to fund the business. It is, however, not necessary that the issued equity must return a dividend for it is based on profits and the terms of business.
Categories of equity instrument
The equity instruments can be divided into numerous categories, the most common ones being:
- Common stock is one of the equity instruments issued by a public company to raise funds from the public. The shareholders have the privilege of being entitled to co-ownership of the company in addition to having the right to vote at the shareholders meeting as per the proportion of shares. Besides, they also have rights to take decision in important issues like raising capital to pay dividends and merging business. Moreover, the shareholders can also apply for new shares when the company has increased capital or issues a new allocation to the shareholders.
- Convertible debenture is another type of equity instrument which is similar to common bonds, the only difference being that a convertible debenture can be converted into common stock during the particular rates and prices mentioned in the prospectus. Convertible debentures are quite popular for profitable returns from converted stock are higher than those form common bonds.
- Preferred stock, another equity instrument, involves shareholders’ participation as a business owner as in common stock. The variation lies in that the preferred shareholders are entitled to receive repayment of capital prior to the common shareholders.
- Depository receipt is an equity instrument which entitles the rights to reference common bonds, ordinary debentures, and convertible debentures. Investors holding a depository receipt get benefits as shareholders of listed companies in every respects, be it the voting rights or financial rights in the listed companies.
- Transferable Subscription Rights (TSR) is an equity instrument issued by a company to all shareholders in proporti8on numbers of shares already held by them. This instrument is used as evidence in shares of the company. The existing shareholders can sell/transfer their rights to others if they do not want to exercise their shares.