Equity Shares, Preference Shares, Convertible Notes and Rights - Assignment Example

The research carried out on ASX to find the different type of securities being offered on the exchange shows that ASX offers equity shares, preference shares, convertible notes and rights which can be purchased in the market. On the back drop of the different type of securities it is seen that people can trade in all thereby enabling them to create a portfolio with different variety. Also the fact that the characteristics differs gives investor an opportunity to purchase different securities based on time frame, risk, liquidity and so on. The fact that the securities have different procedures of payment in case of winding up and the factors an investor needs to consider while investing throws light on various important factors. Thus, an investor willing to invest on ASX can on the basis of the following research decide the portfolio and the type of securities he wishes to invest. 1. Companies issue different types of securities based on their requirements. Following are the companies which have issues equity shares, preference shares, convertible notes and rights which can be purchased in the market Woolworths Limited is an Australian company which functions in the consumer staple industry and has issued equity shares in the public. It is one of the largest retailer and deals in “liquor, hotels, petrol, consumer electronic, everyday requirements and home improvements”. (Woolworths Website, 2010) The wide range of product and dispersion has made it a huge success. The ASX code for Woolworth is WOW. Australia and New Zealand Banking Group is an Australian bank which functions in the banking industry and have preference shares in the public. It stands fourth in this sector and due to proper services and wide network with banks at all major places have helped it earn a strong customer base. (Australia and New Zealand Banking Website, 2010) The ASX code for Australia and New Zealand Banking Group is ANZ Coretrack Limited is an Australian company which functions in the energy sector industry and has issued convertible notes in the public. Since inception the company has been concentrating on quality and deals in “down whole tools, products and services for the energy industry”. (Coretrack Website, 2010) The ASX code for Coretrack Limited is CKK. Benitec Limited is an Australian company which functions in the pharma sector industry and has issued rights in the public which can be purchased. Since its inception in 1977 the company has performed in “RNA interface technology which is used for the treatment of RNA virus”. (Benitec Website, 2010) This company based on it develops medicine which is widely used for cancer and neurological diseases. The ASX code for Benitec is BLT. 2. Different securities have different characteristics and risks based on which an investor invests in that particular securities. The characteristics of equity shares, preference shares, convertible notes and rights are provided below The characteristics of equity shares are as Equity shareholders are “owners of the company and have voting rights pertaining to all matter of the company”. (Scott, 2008) The liability of “equity shareholders is limited to the capital contributed by them in the form of share value so their personal belongings cannot be used in case the company goes bankrupt and needs to pay them back”. (Scott, 2008) This thus puts a cap on liability The equity holders have “unlimited right on the profits i.e. after all the external has been met with whatever remains is the share for the equity holders”. (Scott, 2008) The company pays them by dividend. The company in case of no profits pays nothing thereby still giving an option to the holders to unlimited gains. The holders of equity are “paid at the end in case of liquidation after all the external expenses have been met”. (Scott, 2008) This increases the risk as nothing could be paid if nothing remains after paying the external debt thereby leading to loss of initial investment. The equity shares are “easily tradable and therefore is very liquid”. (Scott, 2008) A holder can sell his share in the market if he needs money thereby enabling them to get funds easily. The equity holders take risk and could run into losses as there is a chance that the company loses money thereby intensifying the risk associated with the security. Equity shares provide the holders of the instrument a right to get first priority if the company wishes to raise more equity thereby giving them an opportunity to become a major owner (Wills, 2010) The characteristics of preference shares are as follows Preference shares are different from equity and has a higher valuation in monetary terms (Justin, 2010) Preference shares don’t have “voting rights in the affairs of the company except in certain cases where voting rights are provided to the shares”. (Justin, 2010) These are special type of share. Preference share have a “preferential treatment with regard to dividend and are paid before the equity holders are paid for”. (Justin, 2010) Some preference shares have a right to dividend irrespective of the income. A prescribed rate is provided and based on that they have to be paid. Preference shares have a “preferential right in winding and their shareholders need to be paid before the equity shares are paid for”. (Justin, 2010) This gives them a preferential right and ensures that their investment is safe Preferential shares though similar like equity doesn’t dilute the control. (Justin, 2010) They are issued with the intention that the owner capital doesn’t increase which could have an effect on the return on equity Preference shares also helps to “prevent takeovers as they are designed in such a manner that hostile takeover reduces”. (Justin, 2010) The company can issue these shares when they feel that there is a chance of takeover thereby growing the base of shares which reduces the chances of such an act to occur. Preference shares have “the rate of dividend prescribed at the time of issue”. (Andrew, 2010) This thus reduces the risk as investor based on their appetite and risk taking nature can decide on it. The preference shares get “redeemed after a certain time interval”. (Andrew, 2010) This ensures that the investment made by the investor will be returned and he doesn’t have to wait till perpetuity or winding up to get his initial investment back. Preference share also have a variety in “cumulative preference share where the dividends get added on and needs to be paid in the following year in case the company is unable to pay then”. (Andrew, 2010) This ensures a fixed payment and the risk gets mitigated The characteristics of convertible notes are as follows Convertible bonds have an option “where the buyer can exercise that option and convert the bonds into a common stock”. (Convertible bonds, 2010) This thus provides the buyer with the additional facility to become the owner. It proved an “opportunity to earn extra profits”. (Convertible bonds, 2010) The investor when sees that the company is doing well can exercise his right and convert it into equity. This will give him more dividend and an opportunity to earn more The company also doesn’t “have to pay back the money raised through convertible as it gets converted into equity”. (Convertible bonds, 2010) This saves the company from the extra burden of paying back the money Convertible bonds help investors as “a time when the share price is higher than convertibles the investor can convert it which will increase its value”. (Convertible bonds, 2010) Since, equity is easily traded and convertible bonds have been converted thereby the investor can trade and earn extra profits Convertible bonds are less “volatile compared to equity which makes it a safe investment opportunity”. (Convertible bonds, 2010) Convertible bonds also give “safety at time of maturity and ensures a regular return”. (Convertible bonds, 2010) This thus ensures that it acts as a fixed income security giving more leverage and advantage compared to others. The characteristics of rights issue are as follows Investors get a right to purchase the share of the company “at a rate much lower than the rate prevailing in the market”. (ACCA, 2009) This helps the investor to become the owner of the company at a rate lower than the market rate Rights issue are made to the “holders of the equity on the date when a right is announced”. (ACCA, 2009) This is thus a mechanism which ensures that the holders of the company get some preferential rights to earn more by investing into the shares. Rights issue also provide the “owner of the equity to renounce his right in favour of some other person thereby enabling the other person to take advantage of the availability of shares at a lower rate”. (ACCA, 2009) The other person pays some commission to the renounce Rights issue also helps the company to ensure that “takeovers are reduced as the number of shares issued increases which thereby reduces takeovers”. (ACCA, 2009) This is thus a tool in the hands of the company which ensures that the company is able to save itself from takeovers. 3. Yes, there is likelihood that the company goes bankrupt and the investor who have invested in equity shares, preference shares, convertible notes and rights loose the entire sum invested by them. In case such an incident of bankruptcy happens than a prescribed format by law needs to be followed to pay the external debt. The pattern of payment for the equity shares, preference shares, convertible notes and rights will be as follows Firstly, convertible bonds need to be paid off on the condition that it has not been converted. Since, it is similar like an interest bearing security they have a first right. (Nawaz, 2009) Secondly, preference shares needs to be paid as they have a “preferential right over the equity shareholders in case of winding up”. (Nawaz, 2009) Thirdly, rights issue need to be paid off as they are “the equity share but since they have a power of right before the original owner of the company they are paid prior to equity”. (Nawaz, 2009) Lastly, the “equity shareholders are paid” (Nawaz, 2009) as they are the owner. 4. An investor looking to invest in the market needs to look at various factors before deciding the investment pattern as the decision to invest is heavily influenced by this factors. Firstly, the most important is that an investor should ensure that the expenses for his basic necessities of life are met. This will help him to have a clear vision for investing. Secondly, the risk taking ability the investor has. (Wonder, 2010) This has a huge role to play as it will decide the instrument the investor wants. It will also help to differentiate and make the investor create a portfolio in a manner which suits his needs. Thirdly, deciding upon the size of investment. (Wonder, 2010) This will help to gauge the investment to be made. It will also help to decide the different securities that can be brought and the pattern in which the investment has to be done. Fourthly, looking into the security aspect of investing is an important consideration to be made. (Wonder, 2010) This will ensure that the chance of loosing the fund invested reduces. This will ensure that investment is safer. Fifthly, looking into the liquidity aspect is very important. (Wonder, 2010) This will help to determine the short term pattern and will help the investor to ensure that he gets his funds back easily when he needs fund. This will ensure that the lock in period is not high. If I was given an opportunity to invest 5000 Australian dollars for a period of one month I would have invested in equity shares. The reason for doing so it that the period for one month is a short one and liquidating after that period has to be a priority. Since, the stock exchanges all around are showing improvement as the economy is reviving back on its feet so it will provide an opportunity to earn more. Also, the fact that returns on equity shares are increasing so investing in equity would be a good option. Also the fact that equity shares provide easy tradability will ensure that I can jump from one stock to another and create a portfolio where I have different kind of stocks thereby mitigating the risk. This will provide me with the opportunity to even ensure the short term gains and having different shares will diversify risk. Investing in equity will also ensure that I am able to get an opportunity to tap bonus issues if it arise in the period of time thereby doubling my shares and also trading it at the time of declaration will help to provide additional benefits. Thus, investing in equity will provide additional benefit in comparison to preference shares, convertible notes and rights as these forms of investment will ensure a lock in period and also the advantages as mentioned above that accrues to equity shares will not be warranted with. (2194 words) References ACCA, “Classification of rights issue: amendment to IAS 32”, Financial Reporting, ACCA, 2009 Andrew M, “Multibagger Stock ideas”, Company Account, Issue of Shares, 2010 Australia and New Zealand Banking Website, 2010, retrieved on September 6, 2010 from http://www.anz.com/personal/ Benitec Website, 2010, retrieved on September 6, 2010 from http://www.benitec.com/ Coretrack Website, 2010, retrieved on September 6, 2010 from http://www.coretrack.com.au/ Convertible Bonds, “Convertibles”, Investing for beginners, about.com, The New York times Company, 2010 Justin H, “Features of preference shares”, Asset Management Company, Financial express, 2010 Nawaz E, “who gets paid first in case the company is liquidated”, Winding up petition, Word Press, 2009 Scott T, “Characteristics of Equity”, The New York Times Company, 2008 Woolworths Website, 2010, retrieved on September 6, 2010 from http://www.woolworths.com.au Wills, “Features of equity shares”, Investing and Financial Markets, Answer Corporation Ltd, 2010 Wonder W, “5 factors to think about before you start investing”, Personal Finance, Word Press Admin, 2010 Read More