Equities - Types and Rights
Modern forms of investment tradable on the stock exchange, include the so-called derivatives. The value of these securitites is – quite literally – derived from the market value of their underlyings. Funds as well as investment and leverage products are derivatives.
A stock represents a unit of ownership in a company. Shares are
issued by stock corporations or associations limited by shares and
traded on the stock exchange, where on a continuous basis, prices
are calculated by matching demand and supply.
The bearer or owner of a share, called a shareholder, owns part of the company's capital stock, indicated either as a percentage of the total share capital or as a par value that is printed on the share certificate. The rights vested in the shares are regulated by the German Stock Corporation Act and the company's charter.
Basic shareholder rights include:
- the right to attend the annual general meeting,
- the right to vote at the annual general meeting,
- the right to receive a share of the company's profits,
- the right to subscribe to new shares.
Shares are classified according to various criteria, such as the way in which the capital stock is divided up, the fungibility of the shares, or the type of rights attached to the shares:
- Par value shares vs. no-par value shares. while par value shares state a fixed amount of the capital stock, no par-value shares securitize a percentage share in the capital stock of a company.
- Bearer shares vs. registered shares (or registered shares with restricted transferability). The owner of a registered share is named in a company's shareholder record. Registered shares with restricted transferability are a particular type of equity, because the transfer of ownership is subject to approval by the stock corporation. As far as bearer shares are concerned, the shareholder right is merely bound to the ownership of the share.
- Ordinary shares vs. preferred shares. Unlike ordinary shares, preferred shares do not carry voting rights. Instead, preferred shares usually take precedence over ordinary shares when it comes to the distribution of profits and liquidation proceeds of a stock corporation.
Compared with other countries, only few Germans are using shares as
an investment instrument. The proportion of owners of stocks or
fund shares is below 20 percent. Deutsches Aktieninstitut (DAI)
compiles and publishes the latest figures on a regular basis.
In principle, shares offer opportunities and risks, because their prices can rise or fall. The price depends on the market's expecations as to the company's profits. Based on the scope of investors' expectations, demand and supply often coincides. The price development of shares is covered in various media, such as daily newspapers, TV and radio channels and the Internet.
In addition to the price development, investors are becoming
increasingly interested in the dividends distributed by stock
corporations among their shareholders.
Shares can be issued by a stock corporation (AG) or a partnership limited by shares (KGaA). Through equities, the share capital of a company is apportioned among smaller shares. The mathematical size – or the size of a participation in the share capital of a stock corporation – is known as the nominal value. Through participations in the share capital, shareholders become co-owners of the company. They possess certain rights but do not have any contractual privileges. Shareholders receive the earnings that remain after paying off the claims of creditors.
For companies, the issuing of shares is a form of participation financing. This form of financing is of crucial significance, especially for the economic development capability of young companies in future-oriented industries.
When going public in Frankfurt, a company chooses one of three market segments and a respective transparency level. This decision determines the follow-on requirements to be fulfilled by the company, such as accounting standards and frequency of reporting, ad-hoc disclosure, etc. Among other things, these obligations serve as a means of investor protection.