SYNOPSIS: Capital

Capital, including securities and exempted debt finance, such as syndicated loans, can include many different products.

Securities represent financial assets that have monetary value and can be traded or participated in. They are generally categorized into several types:

EQUITY SECURITIES

Beyond the scope of this article, represent the ownership interest in a corporation, providing voting rights and potential dividends. Inclusive in this category may be preferred stock, which is simply common stock with a more favorable variance for certain rights, such as a liquidation preference or a dividend or other rights preference.

The contractual terms of the specific instrument determine whether it is classified as an equity tranche security or a debt tranche liability pursuant to the accounting rules. For example, ASC FASB 480-10-05 et seq.

DEBT SECURITIES

• Bonds: Issued by corporations or governments to raise capital, with fixed interest payments and a maturity date when the principal is repaid.

• Treasury Securities: Issued by the U.S. Department of the Treasury, including Treasury bills, notes, and bonds.

• Municipal Bonds: Issued by state and local governments to fund public projects.

• Corporate Bonds: Issued by corporations to raise capital, typically offering higher yields than government bonds.

BANK DEBT

• Syndicated Loans

DERIVATIVE SECURITIES

• Options: Contracts that grant the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a specified date.

• Futures Contracts: Agreements to buy or sell a commodity or financial instrument at a predetermined price on a future date.

• Swaps: Contracts between two parties to exchange cash flows or other financial instruments, often used for managing interest rate or currency risk.

HYBRID SECURITIES

• Convertible Bonds: Bonds that can be converted into a predetermined number of common stock shares.

• Preferred Stocks with Convertible Features: Preferred stocks that can be converted into a predetermined number of common stock shares.

ASSET-BACKED SECURITIES (ABS):

• Mortgage-backed Securities (MBS): Securities backed by a pool of mortgage loans.

• Collateralized Debt Obligations (CDOs): Securities backed by a pool of debt obligations, which can include mortgages, bonds, or loans.

COMMODITY SECURITIES

• Commodities Futures: Contracts to buy or sell a commodity at a future date for a predetermined price.

• Commodity ETFs (Exchange-Traded Funds): Funds that invest in physical commodities or commodity futures contracts.

FOREIGN EXCHANGE SECURITIES

• Forex (FX) Options: Options contracts involving the exchange of one currency for another at a specified exchange rate on a predetermined date.

• Currency ETFs: Funds that invest in foreign currencies.

REAL ESTATE SECURITIES

• • Real Estate Investment Trusts (REITs): Companies that own, operate, or finance income-generating real estate across various sectors.

STRUCTURED PRODUCTS

• Collateralized Mortgage Obligations (CMOs): Securities structured from a pool of mortgage-backed securities, often divided into different tranches with varying levels of risk and return.

RIGHTS

• Rights, in a financial context, refer to a privilege granted to existing shareholders of a company that allows them to purchase additional shares of stock at a predetermined price before these shares are offered to the public. This issuance of additional shares to existing shareholders is known as a rights offering or a rights issue.

• Key features of rights offerings include:

  • Entitlement: Existing shareholders receive the right to purchase additional shares in proportion to their existing holdings. The number of rights granted to each shareholder is typically based on the number of shares they already own.

  • Exercise Price: The price at which the new shares can be purchased through exercising the rights. This price is usually set at a discount to the current market price to incentivize participation.

  • Expiration Date: The deadline by which shareholders must exercise their rights to purchase additional shares. If rights are not exercised by this date, they typically expire worthless.

  • Tradability: Rights are often tradable and can be bought and sold on the open market, allowing shareholders who do not wish to participate in the offering to sell their rights to other investors.

• Rights offerings are a way for companies to raise additional capital from their existing shareholder base while giving those shareholders the opportunity to maintain their proportional ownership in the company. It's a form of preemptive rights for existing shareholders to avoid dilution of their ownership stake when the company issues new shares.

OPTIONS AND WARRANTS

• Options and warrants are both financial instruments that provide the holder with the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time frame. While they share similarities, there are also key differences between them.

• Options:

• Types: Options are typically categorized as call options and put options. Call options give the holder the right to buy the underlying asset, while put options give the holder the right to sell the underlying asset.

• Issuer: Options are standardized contracts traded on organized exchanges, such as the Chicago Board Options Exchange (CBOE), and are not directly issued by the underlying company.

• Expiration: Options have expiration dates, after which they become worthless. There are various expiration cycles available for options trading, including monthly, quarterly, and LEAPS (Long-Term Equity Anticipation Securities).

• Underlying Asset: Options can be based on a wide range of underlying assets, including stocks, stock indexes, commodities, currencies, and interest rates.

• Leverage: Options provide leverage, meaning that a relatively small investment (the premium) can control a larger position in the underlying asset.

• Warrants:

  • Issuer: Warrants are issued directly by the underlying company or by a financial institution associated with the company. They are often used as a financing tool by companies to raise capital or as incentives in conjunction with other securities offerings.

  • Underlying Asset: Warrants are typically issued on stocks, giving the holder the right to buy shares of the company's stock at a predetermined price.

  • Expiration: Warrants also have expiration dates, after which they expire worthless if not exercised. However, warrants generally have longer expiration periods compared to standard options.

  • Transferability: Warrants can usually be bought and sold on the open market like stocks, allowing investors to trade them without necessarily exercising them.

• Similarities between Options and Warrants:

• Both provide the holder with the right, but not the obligation, to buy or sell the underlying asset at a predetermined price within a specified time frame.

• Both options and warrants can offer leverage, allowing investors to control a larger position in the underlying asset with a smaller investment.

• Both options and warrants can be used for speculation, hedging, or generating income through trading strategies.

Certain accounting rules determine whether warrants should be classified as equity or debt. See generally John Coates & Paul Munter, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), U.S. Sec. and Exch. Comm’n (April 12, is 2021), https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs (discussing the factors relevant to a determination as to whether warrants should be characterized as debt or equity).

These are some of the major types of securities, but there can be numerous variations and combinations within each category. 

See Capital, Equity, Securities Exchanges, Broker-Dealer, and Mergers and Acquisitions.

See also Investment Banking and Commercial Finance.