MODULE 4: OVERVIEW OF EQUITY SECURITIES

Types of Equity Investments

VOTING

1. Suppose I have 30% equity (30 shares) in a company and 9 directors are to be elected. Under Statutory Voting, I cast all of my 30 votes to one director. However, under cumulative voting, I can spread out 10 votes to 3 directors or all 30 votes to one director. Cumulative voting helps minority shareholders get representation on the boards.
2. Class A shares (GOOGL) - 1 vote per share.
   Class B shares (GOOG) - 10 votes per share.
   Class C shares (GOOCV) - No voting rights.
   This dual-class structure allows founders to retain control with fewer shares.

PREFERENCE SHARES

1. Participating Preference Shares: Fixed dividend plus extra dividends if profits exceed a threshold. Non-Participating Preference Shares: Fixed dividend only. No sharing in excess profits. Liquidation claim limited to par value.
2. Convertible Preference Shares: Can be converted into common stock at a pre-set conversion ratio.
3. Cumulative Preference Shares If dividends are skipped, they accumulate. Arrears must be paid before common dividends. Strong investor protection.
4. Dividends are paid only if declared by the board. No declaration → no dividend → no legal breach. In cumulative preference shares they accumulate and would be paid later, in non-cumulative they are lost forever.

Foreign Equities and Equity Risk

1. When capital flows freely across borders, markets are said to be integrated.
2. Listing on a foreign exchange increases firm transparency because of more disclosures and firm's publicity.
3. Direct investing is buying foreign firm's stock on a foreign exchange. The investment and return are denominated in a foreign currency.
4. A depository receipt lets you own a foreign company while trading in your local market and currency; a depository bank holds the actual foreign shares and handles dividends and corporate actions. You buy Toyota Motor Corporation ADR (TM) on the NYSE in USD. The real Toyota shares trade in Japan, while JPMorgan holds those shares, converts Toyota's yen dividends into dollars, and pays them to ADR holders.
5. Sponsored DR: issued with company involvement; investors usually get voting rights and better disclosure. Unsponsored DR: issued without company involvement; voting rights stay with the bank and disclosures are lighter.

1. Global Depository Receipts are issued outside both the firm's home country and the U.S., typically trade in London or Luxembourg, are often USD-denominated, and avoid capital-flow restrictions—making it easier for global investors to invest. Firms list them where investors already recognize the company. Tata Motors has GDRs traded in London, letting international investors buy exposure to Tata Motors in USD without dealing with Indian market restrictions.

1. ADRs trade in the U.S., in USD, and usually require SEC registration. Some are also privately placed (Rule 144A or Regulation S receipts). ADS (American Depository Share): the actual underlying share of the foreign company that sits in its home market.
2. Level I ADR trade OTC, and cheap to list. Level II ADR trade on Exchanges and are expensive to list. Both these CANNOT raise capital in US.

1. Level III is listed on exchange and CAN raise capital in US.
2. If it's listed publicly, SEC is involved. In all Level I, II and III, SEC registration is required.
3. Rule 144A allows private listing. It is cheap and SEC is not involved. It can raise capital in US.
4. Cumulative preferred: the missed amounts accrue and must be paid before any common dividends. Missed because board does not want to pay the dividend today and wants to postpone it.
5. Non-cumulative preferred: Missed dividends are forfeited (but common still can’t be paid unless preferred is paid for the current period).