Ordinary shares are a type of equity and are the most commonly traded securities on NEX Exchange. The term “equity” is used to describe a financial instrument or security representing a share, however small, in the ownership of a company.
Share ownership gives the holder the right to a proportion of any distributable profits, in the form of dividend payments, and a vote at the Company’s Annual General Meeting (AGM).
Preference shares are often considered a hybrid between an ordinary share and a bond. As their name suggests, these instruments have preference over ordinary shares with regard to payment of dividends and return of capital.
Preference shareholders receive a fixed dividend, usually twice a year, similar to the interest paid on a bond. These payments are made before any dividends are distributed to ordinary shareholders.
Debt securities do not represent a share in the ownership of a company, but rather a ‘loan’ made to the company over a specified period. The debt holder receives a regular, fixed interest payment, or “coupon” for the duration of the debt, and the initial sum invested is repaid when the debt matures. Bonds, debentures, and loan notes are all common debt securities which are traded on NEX Exchange.
The Coupon must be paid irrespective of the Company’s performance and the debt may be secured against the assets of the Company.
A convertible debt security, typically a bond or loan note, gives the holder the choice of redeeming the debt at maturity or, as the name suggests, converting it into a pre-determined number of shares in the issuing company. Convertibles pay a coupon in the same way as normal debt securities, although the yield may be slightly lower because of the option to convert.
A warrant is a security that gives the holder the right, but not the obligation, to buy the underlying security (usually shares) at a fixed price (the “exercise price”) on or before a pre-determined date (the “exercise date”). The initial cost of the warrant is far lower than the cost of the underlying equity and allows the buyer to benefit from a rise in the value of the underlying security whilst limiting their risk.
The value of the warrant is influenced by factors such as the price and volatility of the underlying security price, and the time to expiry.