Equities

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Revision as of 20:04, 6 July 2005

Equities is an umbrella term generally used to refer to stocks and shares. A stock, also referred to as a share, is commonly a share of ownership in a company.

Contents

Purpose of Equities

The owners and financial backers of a company may want additional capital to invest in new projects within the company. If they were to sell the company it would represent a loss of control over the company.

Alternatively, by selling shares, they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally a share in the ownership of the company, including the right to a fraction of the assets of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends. However, the original owners of the company often still have control of the company, and can use the money paid for the shares to grow the company.

In the common case, where there are thousands of shareholders, it is impractical to have all of them making the daily decisions required in the running of a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company. However, the choices are usually nominated by insiders or the board of the directors themselves, which over time has led to most of the top executives being on each other's boards. Each share constitutes one vote (except in a co-operative society where every member gets one vote regardless of the number of shares they hold). Thus, if one shareholder owns more than half the shares, they can out-vote everyone else, and thus have control of the company.

History of Equities

History of stock market trading in the United States can be traced back to over 200 years ago. Historically, the colonial government decided to finance the war by selling bonds, government notes promising to pay out at profit at a later date. Around the same time private banks began to raise money by issuing stocks, or shares of the company to raise their own money. This was a new market, and a new form of investing money, and a great scheme for the rich to get richer. In 1792, a meeting of twenty four large merchants resulted into a creation of a market known as the New York Stock Exchange(NYSE). At the meeting, the merchants agreed to meet daily on Wall Street to daily trade stocks and bonds.

Ithe mid-1800s, the United States was experiencing rapid growth. Companies needed funds to assist in expansion required to meet the new demand. Companies also realized that investors would be interested in buying stock, partial ownership in the company. History has shown that stocks have facilitated the expansion of the companies and the great potential of the recently founded stock market was becoming increasingly apparent to both the investors and the companies.

By 1900, millions of dollars worth of stocks were traded on the street market. In 1921, after twenty years of street trading, the stock market moved indoors.

Progress brought us the Industrial Revolution, which also played a role in changing the face of the stock market. New form of investing began to emerge when people started to realize that profits could be made by re-selling the stock to others who saw value in a company. This was the beginning of the secondary market, known also as the speculators market. This market was more volatile than before, because it was now fueled by highly subjective speculation about the company’s future.

Types of Equities

Ordinary share or common stock

A security that represents ownership in a company. Holders of ordinary shares exercise control by electing a board of directors and voting on company policy. Ordinary shareholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation ordinary shareholders have rights to a company's assets only after bond holders, preferred shareholders, and other debt holders have been paid in full.

Preferred share or stock

A class of ownership in a company with a stated dividend that must be paid before dividends to ordinary share holders. Preferred shares do not usually have voting rights.

Convertible share or convertible preferred stock

A preferred share that can be converted into an ordinary share

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