CFA® Level I · Equities · free lesson

Equity Instrument Features

Before an analyst can value a share, they need to know exactly what the share entitles its holder to: which cash flows, which votes, and what happens if the company fails. This module explains the defining features of common shares, the main varieties of preference shares and other equity-linked instruments, and the practical differences between owning listed and private equity.

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What you will learn

1. Describe the rights and claims attached to common shares and explain why common equity is the riskiest, but potentially most rewarding, claim on a company.

Common shareholders hold the residual claim: they are paid only after creditors and preference shareholders.
Limited liability caps the loss at the amount invested; the upside is unlimited.
Common shares are perpetual and dividends are discretionary, so missing a dividend is not a default.
Voting rights (electing the board, approving major decisions) usually accompany common shares.
Highest risk in the capital structure means the highest required return.

2. Describe the main types of preference shares and other equity-linked instruments, and compare their risk and return with those of common shares.

Preference shares rank ahead of common shares, behind creditors; they usually have a fixed dividend and no vote.
Cumulative shares accumulate arrears that must be paid before any common dividend.
Convertible shares add equity upside: conversion value = conversion ratio x common price.
Callable features favor the issuer (higher required dividend); putable features favor the holder.
Depositary receipts let investors trade foreign shares in their home market and currency.

3. Contrast publicly listed and private equity securities in terms of liquidity, disclosure, pricing, investor base and exit routes.

Listed shares: liquid, continuously priced, open to all investors, subject to mandatory disclosure.
Private shares: illiquid, negotiated prices, limited disclosure, concentrated owners with direct influence.
Private holdings are often valued with a discount for lack of marketability (DLOM).
Private investors exit through IPOs, trade sales, secondary sales or recapitalizations.
IPOs convert private to public equity; take-privates and buyouts do the reverse.

Module at a glance

Common shares carry a residual claim, limited liability, discretionary dividends and usually voting rights.
Common equity is the riskiest claim in the capital structure and requires the highest return.
Preference shares rank ahead of common shares but behind creditors, usually with a fixed dividend and no vote.
Cumulative arrears plus the current dividend must be paid before any common dividend.
Convertible preference shares add upside: conversion value = conversion ratio x common price.
Callable features favor the issuer; putable features favor the investor.
Private equity is illiquid and lightly disclosed, so it is valued with a marketability discount and exited through negotiated routes.

This free module has 3 lessons, 11 practice questions with full explanations.

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