Types of Securities
This is the first of a series of lessons dealing with issues concerning how a corporation raises the money it needs to operate its business. This lesson focuses on the types of securities a corporation may issue (debt and equity) and the reasons it may choose one or the other. The lesson also introduces students to the difference between common and preferred shares and identifies differences in the approaches of Delaware and of the Model Business Corporation Act. After completing the lesson, the student should know: 1. What a corporate security is; 2. What is the legal relationship between the holder of a corporate security and the corporation that issued it; 3. The significance of return ON investment; 4. The significance of return OF investment; 5. The tax implications of different types of securities; 6. How equity securities are shown on a company's balance sheet; 7. The important types of debt securities and their characteristics; 8. The important types of equity securities and their characteristics; 9. Considerations of when to use both debt and equity in financing a corporation.
The second lesson in the series, Issuance of Shares Part I: Basic Concepts, introduces the student to the fundamental legal capital concepts associated with equity capitalization, including par value, capital and capital surplus.
The third lesson in the series, titled Issuance of Shares, Part II, is forthcoming and will address what it means when shares are determined to be fully paid, validly issued, and non-assessable. The fourth and final lesson in the series, Issuance of Shares Part III will cover share subscription agreements and preemptive rights.