What are Equity Securities?

Published by Thomas Herold in Corporate Finance, Investments, Trading

'Equity Securities' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Equity securities prove to be those asset classes which feature shares of stock in a given corporation. Investors hold these as reported by a company’s official balance sheet. Corporations issue such securities in an effort to raise business capital via the financial markets. They use this money for significant company life events, such as for product development, merger and acquisition activity, or internal expansion. The funds are seldom for daily operating needs.

When investors buy equity securities, they gain a partial stake in the underlying firm. This is a primary alternative to turning to the bond markets to borrow money in taking on debt via the publicly traded bond markets. When a company first issues such equity securities, this is called an IPO initial public offering. Companies often raise enormous amounts of cash in this means, since investors are always hunting for new stock issues that will enable them to possess a part of a new and exciting opportunity.

The total number of shares that an IPO released varies wildly. It comes down to the amounts which the companies obtain permission to issue in their financial documents which they file with the regulatory overseer for their area. Corporations are allowed to sell a specific amount of stock shares in a given price range on the actual IPO day. After these shares have been dealt out to the public via the financial markets, the price of their equity will go up and down on the stock markets every trading day. This movement all depends on the perception of investors and the accompanying demand for the shares on any given day.

It is not common for such a firm to issue its entire inventory of available stock shares in a single offering. Rather than do this, they commonly reserve a certain quantity of shares to be issued at a later date in a second offering. This is called a follow on offering or secondary offering. The management of a company would elect to do this as they know they will likely need to raise fresh additional capital in the future in order to pay for hoped for expansionary plans.

When corporations continue to issue out their equity securities via the financial exchanges there is a downside for the existing shareholders and company investors. As additional shares are available to be bought, the pre-existing stake holders have their equity stake diluted as a percentage of the total. As an example, a  major share holder could possess a huge quantity of shares that equate to fully 10 percent of all outstanding company shares which can be traded. Should the company choose to boost the total number of shares which are tradable, the equity of the shareholders will immediately drop in terms of the percentage ownership of all available shares.

The main alternative to issuing equity securities lies in issuing debt securities These publicly issued bonds offered via the bond markets by a company (or even government) raise money by taking on debt which must be repaid one day, known as the maturity date. Investors who buy debt instruments like these become de facto creditors of the bond issuing entities. The main disadvantage to such issuance in debt is that the company issuing has to provide continuous interest payments to the bond holders throughout the life of the bond contract. The company is able to maintain its ownership in itself in exchange for this trade off of interest payments.

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The term 'Equity Securities' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.