discuss the characteristics of equity securities available to investors, including classes of stock and American Depository Receipts.
The returns of equity securities are not contractual. This means that return of an equity investment can be much better
or worse than that of a bond, which has contractually fixed
payment schedule.
Common stocks represent ownership shares in a corporation. Owners of the common stock
of
a firm share in the company's successes
and problems. The two most important characteristics of common stock as an investment are:
Residual claim: it means
that stockholders are the last in line of all those who have a
claim on the assets and income of the corporation.
Limited liability: it means
that the greatest amount shareholders can lose in event of failure of the corporation is their
original investment.
People tend to divide the vast universe of stocks into categories based on general business
lines and by industry within these business lines.
The division
gives
classifications for
industrial firms, utilities, transportation firms, and financial institutions.
Within each of these
business lines are industries. The most diverse group -
the industrial group -includes such
industries as automobiles, industrial machinery,
chemicals and beverages. There are four
ways to invest in foreign equities:
The easiest way to acquire foreign shares directly is through American Depository Receipts (ADRs), which are
domestically traded securities representing claims of shares of foreign stocks. Those shares are held in deposit in a bank in the firm's home country. Investors buy and sell ADRs in US dollars and receive all dividends in US dollars. This means that the price and returns reflect both the domestic returns for the stock and the exchange rate effect. They are now quite popular in the US
because of their diversification benefits.
American shares are issued in the US by a transfer agent acting on behalf of a
foreign firm.
Direct purchase of foreign shares: buy the shares on the stock exchange where the firm is listed.
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