Investment Securities - Other Types of Equity Securities

Exam Tips and Tricks

You will need to know at least one example of "other" securities for the exam.

American Depository Receipts (ADRs)
Foreign corporations may choose to "list" their shares on U.S. stock exchanges by issuing American Depository Receipts. This allows American investors to purchase the companies' shares without the companies having to register with the SEC. Typically, a large U.S. bank with offices in the foreign country will purchase a large quantity of the stock, hold it in trust and then issue the ADRs, which are backed by the shares held in trust. ADR purchases receive no voting rights. Dividends are declared in the foreign currency, but converted and paid in U.S. dollars.

Look Out!
Watch for "incorrect" answers to ADR questions, for example that dividends are paid in the foreign currency, that ADR holders have voting rights like holders of any other stock and that shares are held in trust at a foreign bank

Also known as subscription rights, these privileges grant to existing shareholders the right to subscribe to shares of a new offering of common stock before they are offered to the public and at a lower subscription price than the market.

  • Because a corporation issues rights to raise additional funds quickly, these rights usually have a short life - a maximum duration of 45 days - during which they may be exercised, and they are freely transferable in the secondary market. That is, they may be traded like stocks on an exchange.
  • While in most cases, the offer ratio is 1-to-1 (that is, one share per subscription right), companies may offer rights according to a different subscription ratio.
  • Rights that are not exercised or sold will expire at the end of the offer period, at which time the corporation will seek other financing options.

Warrants are like stock rights in that they offer the option to buy common stock in the future, at a specific subscription price. However, unlike rights, warrants usually do not expire for three to five years. In fact, many warrants have no expiry dates. Moreover, as you saw above, the subscription price for a rights offering is usually less than the stock's market price. Warrant subscription prices, on the other hand, are always higher than the current market price for the newly issued stock. Warrants are also traded on the open market.

Options are contracts to buy or sell a certain number of shares of an underlying stock (usually in round lots of 100) at a specified price over a given period of time. The party who buys the option, the buyer or holder, pays for the right to exercise the terms of the contract. The other party grants the owner the rights that may be exercised and is called the writer or seller of the option.

There are two types of options: calls and puts. The holder of a call option buys the right from the writer to buy an underlying security - or "call" the security away from the seller - at a fixed price. The writer of the call option in turn has an obligation to sell the security at that fixed price if the buyer exercises the right to call the stock away from the seller. When an investor owns a put, he has the right to sell, or put, the underlying security to the writer at a fixed price. The writer in turn has an obligation to buy the security from the put owner.

If the topic of options has you confused, see our Options Basics tutorial for a basic run through on options, and how they work, and why they are used.

Look Out!
Keep in mind that a right has a much shorter exercise period
than a warrant and is offered at a lower market price than the stock. The opposite is true for warrants.

Special Securities

  • Exchange Traded Funds (ETFs): ETFs are a type of security which combine features of both stocks and mutual funds. Each ETF is designed to track an index and owns a number of stocks. The portfolio is not actively managed and the ETF is traded like a stock. Therefore, the price of the ETF fluctuates throughout the day based on market demand.
  • Hedge funds: Hedge funds are aggressive portfolios designed to both maximize returns while minimizing risks. They are available only to large sophisticated investors and are therefore unregulated.
Related Articles
  1. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  2. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  3. Investing Basics

    How to Vet Financial Advisors Via BrokerCheck

    Many people research restaurants or movies, but few select brokers or financial advisors with much research. Here's how BrokerCheck can help.
  4. Professionals

    Career Advice: Financial Planner Vs. Stockbroker

    Read an in-depth review of a career as a financial planner as opposed to a career as a stockbroker, including how to decide which is best for you.
  5. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  6. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  7. Professionals

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
  8. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  9. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  10. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  1. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  2. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  3. Do financial advisors need to be approved by FINRA?

    The term "financial advisor" can refer to a couple of different roles. It most often refers to a broker-dealer or an investment ... Read Full Answer >>
  4. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
  5. What are some of the major regulatory agencies responsible for overseeing financial ...

    There are a number of agencies assigned to regulate and oversee financial institutions and financial markets, including the ... Read Full Answer >>
  6. Why is the Nasdaq more heavily weighted to tech stocks than other stock exchanges?

    The Nasdaq became the world's first electronic stock exchange at its inception in 1971. The exchange's dedication to advancing ... Read Full Answer >>
Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!