Understanding Equities: Primary, Secondary Markets & Shareholder Rights
Understanding Equities and Their Characteristics
Unlike fixed income investments, equities do not guarantee a specific return. Instead, equity holders receive a portion of the company’s profits. The most common type of equity is shares, representing over 90% of the variable income market.
A key feature of equities is that they grant the owner membership in the entity. This membership comes with statutory rights, including the right to participate and vote at General Meetings.
Primary Market: Issuing New Assets
The primary market, also known as the emission market, is where companies issue new assets to raise funds. These are newly created transactions occurring for the first time.
Secondary Market: Trading Existing Assets
Secondary markets, also called trading markets, involve the trading of existing financial assets. This market facilitates changes in ownership and is often referred to as the second-hand market.
Understanding Stocks (Shares)
Stocks, or shares, represent a portion of a corporation’s capital stock. Dividends can be paid monthly, quarterly, semi-annually, or annually. Companies often distribute dividends to shareholders before the year-end as an advance on the year’s profits.
Rights and Obligations of Shareholders
- Right of participation
- Right to information
- Right of separation from the company
Bonds
- Obligation to pay the agreed contribution at the time of signing.
- Accountability for the capital contributed, considering debts and losses.
Types of Shares
Registered and Bearer Shares
Registered shares specify the holder’s name, while bearer shares implicitly designate the holder as the owner of the document.
Regular and Privileged Shares
Holders of common stock have the standard rights and obligations of membership. Privileged shares have additional rights as defined in the articles of association.
Syndicated Shares
These shares require that any transmission be offered primarily to existing shareholders.
Nonvoting Shares
Corporations can issue shares without voting rights, provided the nominal amount does not exceed half of the paid-up share capital.
Return on Sale of Shares
From a financial perspective, stock returns can be obtained in several ways:
- Dividends: Vary based on the company’s economic performance during the year.
- Sale (Capital Gains): The difference between the sale price and the purchase price.
- Capital Increases and Convertible Bond Issues: Preferential subscription rights can be converted to cash if new shares are not subscribed.
- Other Sources: Such as loans through the sale of shares or options to purchase shares.