Equity Securities: Shares, Rights, and Corporate Actions
Scope
This domain tests the rights attached to equity securities and the mechanics of corporate actions that change share count, price, or entitlements. Expect questions on common versus preferred shares, dividends, splits, rights offerings, and record and ex dates.
Core rules
- Common shares carry voting rights and residual claims; preferred shares rank ahead for dividends and liquidation but usually lack voting rights and may be cumulative, participating, or convertible.
- Authorized capital is the charter limit; issued shares have been sold; outstanding shares are issued less treasury shares. Treasury shares have no voting or dividend rights.
- Cash, stock, and property dividends are declared by the board with record and payment dates. A stock split increases shares and reduces par value; a reverse split does the opposite.
- In a rights offering, existing holders may receive pre-emptive rights to subscribe at a set price, usually pro rata. Warrants and convertibles can dilute existing holders.
Worked example
An investor owns 2,000 shares trading at PHP 25. A 25% stock dividend gives 500 additional shares, for 2,500. Ignoring market moves, the theoretical ex-price is PHP 25 ÷ 1.25 = PHP 20, so the pre-action value of PHP 50,000 is unchanged. If a 1-for-4 reverse split followed, 2,500 shares would become 625, with a theoretical price near PHP 80.
Traps
The record date is not the payment date, and the ex-date determines whether a buyer is entitled under exchange rules. A stock dividend is not cash income, and a split does not by itself create value. Do not ignore dilution from rights, options, or convertibles.