Understanding The Two Types Of Securities

Securities laws can come as a surprise to folks the first time they become fully aware of how much regulation there is. Rather than just relying on a corporate lawyer to keep things straight, is wise to make sure you have an understanding of securities at the most basic level. To that end, it can be helpful to learn about the two primary kinds of securities, equities, and debts.

Equities

An equity represents a stake in a company. The most common type of equities that most people are familiar with is capital stock, the stuff you see on the ticker every weekday afternoon on channels like CNBC. There are also stock-like vehicles, such as master limited partnerships, that are treated as equities for many purposes.

The core idea of an equity is that it entitles the shareholder to a piece of the company. This includes voting rights, and shareholding businesses have to conduct meetings a few times a year to vote on issues and to inform shareholders of developments.

While dividends are often associated with equities, companies are not obligated to issue dividends to shareholders unless they've already announced them. There may also be reporting requirements that limit how soon a company can cut or upgrade a dividend, allowing shareholders time to process announcements.

If a company goes into bankruptcy and is liquidated, shareholders are among the last folks to be paid out. As with proceedings involving individuals and non-shareholder companies, creditors come first.

Shares of companies can be granted as payment in kind. Note, however, that issuance of shares follows a similar announcement pattern as dividends in order to prevent unexpected dilutions of shareholders' stakes. Most companies will have a securities law attorney check the details of such announcements to be on the safe side.

Debts

Certificates of deposit, bonds, options, and warrants are all forms of debt that a company can sell, usually to raise capital for things like expansion efforts. Debt securities can also be collateralized.

A debt security is fundamentally a promise to the holder to pay a certain amount in a certain timeframe. This has to occur regardless of the company's performance, unlike what happens with stocks where dividends can be cut. Most debts issued by companies are for fixed terms, allowing investors to plan accordingly. Voting rights do not come with debt securities, although some hybrid forms exist that have rights. Notably, securitized debt obligations are prioritized ahead of other company interests during bankruptcy.

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