Question

What are all of the different types of equity instruments that corporation can issue? What is are the differences between the different types of equity instruments? Why would a company want to issue different types of equity?

Answer 1

Different Types of Equity Instruments

Companies use debt and equity to raise additional capital from investors. Equity instruments give the investor a piece of ownership in the company. Some types of equity instruments also come with voting rights. The different types of equity instruments are shown as follows:-

a) Common Stock : It is one of the equity instruments issued by corporations to raise funds from the public. Common Stockholders 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.

b) Preferred Stock : It is another type of equity instrument which involves shareholder's 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

c) Convertible Debentures : It can be converted into common stock during the particular rates and prices mentioned in the prospectus.

d) Depository Receipts : It is an equity instrument which entitles the rights to reference common stock, ordinary debentures and convertible debentures

Companies choose to have multiple classes of equity by issuing different types of equity. The company is able to manage the risk of financing by using the optimum combination of different types of equity instruments resulting in minimum cost of financing. Therefore the company wants to issue different types of equity.