Equity security definition
/What is an Equity Security?
An equity security is a financial instrument that represents an ownership share in a corporation. The instrument also gives its holder the right to a proportion of the earnings of the issuing organization. The typical equity security is common stock, which also gives its owner the right to a share of the residual value of the issuing entity, in the event of a liquidation. A less-common equity security is preferred stock, which may also provide its owner with a periodic dividend, along with other rights that give it a priority interest over the holders of common stock.
Stock Options and Warrants
A variation on the equity security concept is the stock option and the warrant; both instruments give their holders the right, but not the obligation, to acquire shares in a corporation at a certain price, and over a predetermined period of time. These options and warrants have value, so - depending on the circumstances - it may be possible to trade them to a third party.
Advantages of Equity Securities
There are several advantages to owning equity securities. These securities give their holders varying levels of voting rights in regard to certain matters, such as the appointment of a board of directors which then acts on behalf of the shareholders. A sufficiently large amount of ownership of equity securities will give the owner voting control over a business.
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Restrictions on Equity Securities
Depending on the restrictions noted on the face or back of a stock certificate, it may be possible to sell shares to a third party. These restrictions are present when a business is privately held. Or, the restrictions are imposed during the first few months after an initial public offering, so that sales by insiders will not have a negative impact on share prices.
Who Can Issue Equity Securities?
Only corporations issue equity securities. They are not issued by non-profit entities, partnerships, or sole proprietorships. It is much easier for a large publicly-held corporation to issue equity securities, since they can readily sell the shares on a stock exchange.