What Are equities?

[Audio] Now let's go through equities. Equities are another type of financial instrument issued by companies to raise capital. Unlike bonds, where the issuer promises to repay the bondholder with interest, equities do not come with such a commitment. When an investor buys shares, they are purchasing ownership in the company itself. For instance, buying an Apple share means owning a part of Apple. Meaning that no cash outflows/inflows are involved in owning an equity. Investors buy/sell equities out of speculation. To attract and retain investors, companies often reward shareholders, which help maintain a strong reputation and investor interest. Equities are primarily traded on financial markets, but they can also be sold through over-the-counter (OTC) trades, which are private transactions outside of standard exchanges..

[Audio] As previously mentioned, investors speculate on the future price of an equity to try and secure profits. If an investor believes an equity's market price is about to drop, he sells this equity. On the other hand, if an investor believes an equity's market price is about to increase, he buys this equity. The market value of an equity, or stock, can fluctuate over time and is influenced by a variety of factors. One of the key parameters is the supply and demand ratio. In simple terms, this refers to how much of the stock the issuer is willing to sell, compared to how much investors are interested in buying. The market price generally settles at a point where supply and demand are in balance. However, the stock's market value is also closely tied to the performance of the issuer. For example, the price of an Apple share is directly impacted by the company's financial health, product launches, and overall business performance. Beyond the company itself, external factors can also play a significant role in an equity's market value. This includes elements like the political climate, economic conditions, and even global events that may affect investor sentiment and market stability..

[Audio] There are several corporate actions that can be applied to equity instruments, each with its own implications for the shareholders. Let's go through the most common corporate actions: A stock split occurs when an issuer decides to increase the total number of shares by a specific ratio. For example, if a portfolio holds 2 shares and the issuer announces a 3-for-1 stock split, the portfolio will now own 6 shares. The total market value remains the same, so the price per share is divided by the split ratio. It's important to note that no profit is made directly from a stock split. This is a mandatory corporate action. A reverse stock split is the opposite of a stock split. In this case, the issuer decides to reduce the number of shares by a given ratio. For example, a 1-for-2 reverse split would reduce the number of shares in a portfolio by half. To compensate, the market value per share is multiplied by the reverse split ratio, keeping the total market value the same. Like a regular stock split, a reverse split is also a mandatory corporate action. These corporate actions are used by issuers to reward shareholders and are mandatory. In a cash dividend, the issuer pays a specified amount of cash based on the number of shares held. For example, if a portfolio owns 10 shares and the dividend is 0.1 USD per share, the shareholder would receive 1 USD in cash. A stock dividend works similarly but instead of cash, the issuer gives additional shares. If the dividend is 0.2 shares per share held, a portfolio owning 10 shares would receive 2 additional shares. In the case of a cash dividend, the equity's market value typically decreases by the dividend amount. For a stock dividend, the total market value remains the same, but the shareholder owns more shares. The option dividend is similar to a cash or stock dividend, but with an added element of choice. This is a mandatory with choice corporate action. The issuer provides shareholders with multiple options for receiving their reward. For example, the shareholder may choose from 2 USD per share, 1.5 EUR per share, or additional shares (such as 0.1 share per share held). The Dividend Reinvestment Plan (DRIP) is a voluntary corporate action. In this case, the shareholder is given the option to reinvest the dividends they receive into additional shares of the same instrument. This agreement is typically long-term, and shareholders benefit by often receiving shares at a discounted price while avoiding additional broker fees. Finally, the scrip corporate action is used by the issuer to reward shareholders without having to immediately pay them. The scrip action can be divided into two steps: scrip distribution, that is mandatory and scrip dividend, that is mandatory with choice. In these cases, the issuer provides shareholders with rights to purchase additional shares, typically at a discounted price, instead of paying them a cash dividend right away..

[Audio] Let's walk through an example of how a portfolio is affected by a split corporate action. Imagine a portfolio initially holds 100 USD in cash. The investor then purchases 100 equities at 1 USD each, so now the portfolio holds 100 equities and 0 USD in cash. Next, the issuer announces a split as a mandatory corporate action. This means that for every share held, the shareholder will now own 2 shares The portfolio now holds 200 equities..

[Audio] Again, with the same example. The investor purchases 100 equities at 1 USD each, And now the portfolio holds 100 equities and 0 USD in cash. The issuer announces a reverse split as a mandatory corporate action. This means that for every 2 shares held, the shareholder will now own 1 share The portfolio now holds 50 equities..

[Audio] In the case of the cash dividend corporate action The investor purchases 100 equities at 1 USD each, And now the portfolio holds 100 equities and 0 USD in cash. The issuer announces a cash dividend as a mandatory corporate action. This means that for every share held, the shareholder will receive 0.2 USD The portfolio now holds 100 equities and 20 USD..

[Audio] For the stock dividend corporate action The investor purchases 100 equities at 1 USD each, The portfolio now holds 100 equities and 0 USD in cash. The issuer announces a stock dividend as a mandatory corporate action. This means that for every share held, the shareholder will receive 0.1 additional share The portfolio now holds 110 equities..

[Audio] Considering the option dividend corporate action The investor purchases 100 equities at 1 USD each, The portfolio now holds 100 equities and 0 USD in cash. The issuer announces an option dividend as a mandatory with choice corporate action. This means that for every share held, the shareholder will receive 0.1 additional share or 0.2 USD The shareholder chooses to split his holdings, 60% of the dividend is received in equity and 40% is received in cash. The portfolio now holds 106 equities and 8 USD..

[Audio] The dividend reinvestment plan is an agreement between the issuer and the shareholder, it's a voluntary corporate action. After the investor buys 100 share at 1 USD each The portfolio holds 100 share and 0 USD If the investor agreed to a DRIP stating that every dividend received is to be reinvested by acquiring equity at 90% of its listed market price and the issuer distributes a cash dividend of 0.2 USD/share The shareholders does not receive the dividend, instead he receives an additional 20.2 shares. It is equivalent to receiving the cash dividend and then using it to buy back additional shares, but without paying broker fees and buying the additional shares at a discount price. Afterwards, the issuer distributes a stock dividend of 0.1 share/share Instead of receiving 12 shares, the shareholder receives 13.3 shares. It is equivalent to selling the received shares at their market price and then buying them back at a discounted price and without additional fees..

[Audio] Taking the same example, The investor buys 100 shares at 1 USD each The portfolio now holds 100 equities and 0 USD Next, the issuer announces a scrip distribution, every two shares held, the shareholder will receive 1 scrip warrant—a financial instrument. The portfolio now owns 100 equities and 50 scrip warrants. After some time, the issuer executes a scrip dividend, for every scrip warrant held, the shareholder can choose either 2 USD in cash or 1 additional equity. In this case, the investor decides to split the reward: The investor takes half in cash: 25 warrants x 2 USD = 50 USD. The other half is taken in additional equities: 25 warrants x 1 equity = 25 more equities. After the scrip dividend is processed, the portfolio now owns 125 equities and 50 USD in cash. It's also important to note that warrants can be bought or sold between the scrip distribution and the scrip dividend. However, only the holder of the scrip warrants on the scrip dividend date is eligible to receive the payout, whether in cash or additional equities..