Equity instruments
- 1. Gulshankumar S 192SCMD017 Finance Financial Instruments Financial instruments are assets that can be traded, or they can also be seen as packages of capital that may be traded. Most types of financial instruments provide efficient flow and transfer of capital all throughout the world's investors. These assets can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence of one's ownership of an entity. Types of Financial Instruments Financial instruments may be divided into two types: cash instruments and derivative instruments. Cash Instruments The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily transferable. Cash instruments may also be deposits and loans agreed upon by borrowers and lenders. Derivative Instruments The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates, or indices. An equity options contract, for example, is a derivative because it derives its value from the underlying stock. The option gives the right, but not the obligation, to buy or sell the stock at a specified price and by a certain date. As the price of the stock rises and falls, so too does the value of the option although not necessarily by the same percentage. There can be over-the-counter (OTC) derivatives or exchange-traded derivatives. OTC is a market or process whereby securities–that are not listed on formal exchanges–are priced and traded. Asset classes Financial instruments may also be divided according to an asset class, which depends on whether they are debt-based or equity-based.
- 2. Debt-Based Financial Instruments Short-term debt-based financial instruments last for one year or less. Securities of this kind come in the form of T-bills and commercial paper. Cash of this kind can be deposits and certificates of deposit (CDs). Exchange-traded derivatives under short-term, debt-based financial instruments can be short-term interest rate futures. OTC derivatives are forward rate agreements. Long-term debt-based financial instruments last for more than a year. Under securities, these are bonds. Cash equivalents are loans. Exchange-traded derivativesare bond futures and options on bond futures. OTC derivatives are interest rate swaps, interest rate caps and floors, interest rate options, and exotic derivatives. Equity-Based Financial Instruments Equity Instrument Defining equity instrument An equity instrument refers to a document which serves as a legally applicable evidence of the ownership right in a firm, like a share certificate. Equity instruments are, generally, issued to company shareholders and are used to fund the business. It is, however, not necessary that the issued equity must return a dividend for it is based on profits and the terms of business. Categories of equity instrument The equity instruments can be divided into numerous categories, the most common ones being: Common stock is one of the equity instruments issued by a public company to raise funds from the public. The shareholders have the privilege of being entitled to co-ownership of the company in addition to having the right to vote at the shareholders meeting as per the proportion of shares. Besides, they also have rights to take decision in important issues like raising capital to pay dividends and merging business. Moreover, the shareholders can also apply for new shares when the company has increased capital or issues a new allocation to the shareholders. Convertible debenture is another type of equity instrument which is similar to common bonds, the only difference being that a convertible debenture can be converted into common stock during the particular rates and prices mentioned in the prospectus. Convertible debentures are quite popular for profitable returns from converted stock are higher than those form common bonds.
- 3. Preferred stock, another equity instrument, involves shareholders’ participation as a business owner as in common stock. The variation lies in that the preferred shareholders are entitled to receive repayment of capital prior to the common shareholders. Depository receipt is an equity instrument which entitles the rights to reference common bonds, ordinary debentures, and convertible debentures. Investors holding a depository receipt get benefits as shareholders of listed companies in every respects, be it the voting rights or financial rights in the listed companies. Transferable Subscription Rights (TSR) is an equity instrument issued by a company to all shareholders in proporti8on numbers of shares already held by them. This instrument is used as evidence in shares of the company. The existing shareholders can sell/transfer their rights to others if they do not want to exercise their shares. Warrants offer the right to purchase common stock at a certain price. They are valid only for a limited period of time. The warrant expires if you do not purchase the stock within the specified time frame. Warrants may be offered to existing shareholders or packaged with a new purchase of stock or bonds. Options are similar to warrants, but the option holder must pay for the right to purchase or sell stock at the specified price. Brokers and private investors may sell their own customized option packages. A call option grants the holder the right to purchase shares, while put options offer the right to sell a certain number of shares. The party selling the option is obligated to complete the transaction if the buyer chooses to exercise. If the option expires without being exercised, the buyer loses the money he paid for the option. Reference https://www.upcounsel.com/equity-instruments https://www.investopedia.com/terms/f/financialinstrument.asp https://www.readyratios.com/reference/accounting/equity_instrument.html