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Asset classes and financial instruments - Equity securities

5 important questions on Asset classes and financial instruments - Equity securities

What are common stocks or equities?

Equities, represent ownership shares in a corporation. Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to a vote at the corporation’s annual meeting and to a share in the financial benefits of ownership.

What does voting by proxy mean?

Empowering another party to vote in their name.

What is the residual claim of common stocks?

Residual claim means that stockholders are the last in line of all those who have a claim on the assets and income of the corporation. For a firm not in liquidation, shareholders have claim to the part of operating income left over after interest and taxes have been paid. Management can either pay this residual as cash dividends to shareholders or reinvest it in the business to increase the value of the shares.

Why are preferred stocks sold at lower yields than corporate bonds?

Presumably, this reflects the value of the divi- dend exclusion, because the higher risk of preferred would tend to result in higher yields than those offered by bonds. Individual investors, who cannot use the 70% tax exclusion, generally will find preferred stock yields unattractive relative to those on other available assets.

What are depository receipts?

American Depository Receipts, or ADRs, are certificates traded in U.S. markets that represent ownership in shares of a foreign company. ADRs were created to make it easier for foreign firms to satisfy U.S. security registration requirements. They are the most common way for U.S. investors to invest in and trade the shares of foreign corporations.