Equity

When equity is brought up to topics, most people immediately think of bankruptcy, accounting, stocks, banks and other financial institutions. Well, most individuals who come to think of equity this way are on the right track.

Equity

Equity is an accounting term and is used in several ways. Often times, the word equity is used when referring to an ownership in a business. Actually, equity means a stock, the amount of revenue, the principal asset in the investment side. In real estate, it is the difference between the property’s current value and the amount the owner still owes the mortgage.

The list below will clarify what the word really means with regards to where it is being applied.

Common Stock

This is a form of corporate ownership, commonly used in United States. “Ordinary Share” or “Voting Share” means the same. When you own common stocks, you are a part owner of a corporation or business. If the company generates income, stockholders get paid through dividends. The bigger number of stocks you have, the bigger your income will be.

Common stock holders also have the right to vote on certain matters such as dividend policy and corporate governance, electing members of the board, election of senior officers and even in the selection of an auditor. In terms of payouts, common stock holders get their dividends after preferred stock holders got theirs first, if both stocks exist in a company.

If in case of bankruptcy, common stock holders will be receiving any remainder of the funds after bondholders, creditors and preferred stock holders are paid. Common shares are likely to gain more, through the increase in market price, than preferred shares or bonds.

Preferred Stock

Is a kind of stock that has a higher claim on the company’s assets and earnings than a common stock. Preferred stockholders are a level above the common stockholders in terms of hierarchy, which means that in good times, when the company has excess cash and decides to issue dividends, they get to be paid first before the commons; although they are generally paid after bond holders.

Same is true when sad times occur, when the company needs to liquidate its assets, creditors and bondholders gets their share first, the preferred stockholders and lastly, the common shareholders. Unlike the common stock, preferred stock does not include voting rights, but you generally will have an idea when a dividend will arrive because these shares are paid on a regular interval. With the common share, the board of directors decides whether or not to give a payout.

In terms of technicality, preferred share is actually a more secure option since the value does not fluctuate and dividends are guaranteed.

Warrants

Is a form of option given to the holder to avail additional equity. Warrants are usually added to a corporate bond or preferred bond to entice would be investors.

Warrants are issued and given a guarantee by the company. Time frame for a warrant is counted in years and not months, which gives the bond and preferred stock holder another advantage to the common stockholder.

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