Classification of Shares and Stock

The securities dealt with under this chapter fall into two broad families — shares (ownership securities of a company) and stock/fixed-income securities (which pay a fixed return). Knowing the type matters for the arithmetic, because the return is computed differently: a variable dividend for shares versus a fixed rate of interest for stock.

A. Shares are of two main kinds:

1. Equity shares (ordinary shares). These carry no fixed rate of dividend — the dividend depends entirely on the profit the company earns and what its directors decide to distribute. Equity shareholders carry the main risk of the business but also enjoy voting rights and the full benefit of good years. In a bad year they may receive no dividend at all.
2. Preference shares. These carry a fixed rate of dividend and enjoy two priorities over equity shares: their dividend is paid before any equity dividend, and on winding up their capital is repaid before equity capital. In return they usually carry no ordinary voting rights. Preference shares are further sub-classified:
   • Cumulative vs non-cumulative — a cumulative preference share carries forward any unpaid dividend of a lean year to be paid later; a non-cumulative one does not.
   • Participating vs non-participating — a participating share shares in surplus profit beyond its fixed rate; a non-participating one does not.
   • Convertible vs non-convertible — a convertible share can later be converted into equity shares; a non-convertible one cannot.
   • Redeemable vs irredeemable — a redeemable share is bought back by the company after a fixed period.

B. Stock and fixed-income securities:

1. Government stock / bonds — securities issued by a government to borrow from the public, carrying a fixed rate of interest and regarded as very safe. …