Equity
What Is Equity?
Equity is the amount of money the shareholders would have in the event of liquidating the company’s assets and paying its liabilities. Equity represents the company’s book value and reflects the money it owes to its shareholders. Equity can be issued in different forms, such as stocks, convertible notes, warrants, and equity grants.
Simply put, equity is how much ownership someone has in a company, and as a result, they have prorated ownership in the company’s real assets. No payment is promised to equity holders on their investment; they may receive any dividend the firm would pay. The performance of their equity investments is directly impacted by the success of the firm and its real assets as if the firm is thriving; consequently, the equity value will increase; if not, the equity value will decrease.
Types of Equity
There are many forms of equity, but the two most common are common shares and preferred shares. Both represent an ownership stake in the company.
Common Share
Preferred Share
Form
- The most basic form of equity typically makes most of a firm’s equity capital.
- More senior form of equity and more costly than Common shares.
Voting Rights
- Have voting rights.
- No voting rights.
Dividend
- No guarantee of dividend.
- Guaranteed a fixed dividend.
Claim
- Holds a residual claim on the business and therefore has the ultimate control of the company’s affairs.
- Have a higher claim on a company’s assets and earnings than common shareholders.
Level of priority
- Last level of priority (highest risk) for investors.
- Priority over common shareholders in the event of liquidation.
Dilution
- More prone to dilution
- Anti-dilution rights
Conclusion
Each type of equity has its pros and cons, so it is critical to understand the different types of equity and assess a company’s capital structure before making any investment decisions. With a basic understanding of the different types of equity, it is much easier to make more informed investment decisions and achieve better results.