What are the Different Types of Equity instruments ?

Different Types of Equity instruments

Owning Equity in any company or business confers on you a right of ownership on the business. For you to say you have Equity in any business, you must have an Equity instrument. Generally,  Equity instruments are the documents that serve as proof, evidence, or legally binding contracts, that confer on you the right of ownership. Equity instruments are usually available in the Equity market or stock market. Since the Equity market trades these instruments, they are usually the safest places to obtain these documents of ownership. Many times, these instruments are used as assets and collaterals to get loans, in court, or where required. Of the many Equity instruments available, here are the ones you have to know about.

  • Common share certificates

Common shares are usually referred to as ordinary shares or common stock. It is a form of Equity ownership that confers the right to the shares of a company. Individuals or entities are holding common share certificates to certain businesses are regarded as the owners of the business. This is because they are the real risk takers. They receive payments last after the preference shareholders and debt holders have been paid. Your share certificate as a common shareholder is an asset that can be used to obtain certain kinds of loans and declared as part of your total assets.

  • Preferred share certificates

Following from the common shareholders, the preference share certificate confers the rights and benefits you enjoy as preference shareholder. One great thing about holding this certificate is that you are paid first where an issue arises. In essence, your risks are much lesser than the common shareholders as you receive dividends and other related payments before the ordinary shareholders do. You, however, lose the extra benefits that they enjoy.

  • Warrants

Also part of the Equity instruments available in the Equity market or stock market, are warranted. A warrant is an Equity instrument that basically gives you the right but not the obligation, to buy or sell a security or purchase or sell the shares of a company at a stipulated price and at a certain date. It usually stems from an Equity security and unlike the first two kinds of Equity instruments this one has an expiration date. The warrant is an instrument that is issued by the company itself and not the stock exchange. That is one of the differences it has with options.

 

  • Options

Options are related to warrants, but they are largely offered or traded on the stock exchange and not by companies themselves. Options offer you the right to buy (as in call options), as well as the right to sell (as input options), the shares of business on the stock exchange at a particular price known as the strike price and on a particular date as stated in the contract. It is also a derivative instrument even though it largely stems from Equity securities. This document could also serve as an instrument.

These Equity instruments are the most prominent. However, there are others traded on individual stock markets.

Related: DEBT VS. EQUITY – WHAT’S BETTER?

Debt vs Equity
Debt vs Equity

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