FOR BEGINNERS— Many types of securities

Press, 25 February 1987, Page 34

FOR BEGINNERS— Many types of securities

This is the second article in a 16-part series by ADRIAN BROKKING explaining the sharemarket to new investors. The articles were first printed three years ago and were so popular they were reprinted as a booklet. There have been many requests for and inquiries about the articles, so they have been revised, updated, and expanded where necessary. The articles will be printed on the business pages of “The Press” each Wednesday.

There are a number of categories of securities, mainly distinguished according to their risk element.

exchange. Again there are many categories. Companies wishing to borrow money from the public, issue either unsecured notes or debentures. A debenture is secured by a charge over the assets of the company, and as it can be broken down in small denominations, it may be regarded as a kind of contributory mortgage. A "floating” charge simply means that the debenture is secured by unspecified company assets which may change from time to time. In the debenture trust deed will be stated a ratio of assets to debenture the company must stick to. If the assets fall below that level the trustee for the debenture holders may place the company in receivership. Debentures are secure to the extent that the company has assets to cover them.

Government stock and local body stock are often called “gilt-edged” because they are regarded as absolutely safe. Gilt-edged securities may be divided into shortterm loans such as treasury bills, mainly held by banks, and medium to long-term loans,, which include Post Office Bonus Bonds, inflation-adjusted savings bonds, housing bonds, National Development bonds, New Zealand Savings Certificates, ONZ bonds, the various dated Government and local body stocks, and Government premium stock. Some of these are not transferable, and most of them are issued at a fixed rate of interest. Another class of securities with fixed rates of interest are commercial bills (of exchange) and transferable certificates of deposit. They are for large amounts (minimum $20,000) and belong to the province of the money market rather than the Stock Exchange, and we shall not elaborate here. Other fixed-interest securities are deposits in building societies and savings banks, and mortgages, while a life assurance policy must be also considered to be a type of security in the present sense. Again, none of these concern the stock exchange. Apart from Government and local body stock the securities traded on the stock exchange are those of the various commercial enterprises listed by the

A fairly recent development in New Zealand is the issue of convertible debt paper such as convertible notes and debentures which convert to ordinary shares at a specified future date. Until they are converted they carry a fixed interest rate, but their market price tends to fluctuate in a definite relationship with the ordinary shares — depending on the conversion terms and the relative rates of their interest rate and the dividend rate of the shares.

preference shares. Most types of preference shares entitle the holders to a specified amount of the company’s profit which must be paid before dividends are distributed to ordinary shareholders — hence their names.

“Ordinary” preference shares have no claim on the company in bad years when there are no profits. Cumulative preference shares are entitled not only to the preference dividend for the current year, but also for that of previous years if not paid in those years. Usually preference shareholders have no voting rights. The ordinary shareholder of a company does not receive a fixed amount of whatever profit, but takes what is left after everybody else has had their share. Or rather, takes a proportion, because few companies pay out the whole of their profits. They receive a “dividend,” because the amount of profit set aside for distribution is divided equally into the number of ordinary shares. If the company comes to an end, ordinary shareholders usually rank after preference shareholders in repayment of capital. They have the chance to reap greater rewards, but also run a greater risk. For that reason they have the right to vote and to elect the directors to oversee the affairs of the company.

The latest in this category are specified convertible preference shares, that also convert to ordinary shares at a specified future date, but until then are treated as

Just in the latest years companies have begun to issue options; we will discuss these when considering how companies raise their capital. |