This module is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 2 of 7 · 13 min
Equity instruments: shareholder rights, the residual claim and equity cash flows
A share is a standardised, transferable slice of ownership that bundles economic and voting rights, lasts indefinitely, is paid only from what is left after every other stakeholder, and returns cash through discretionary distributions and an eventual sale.
In short
- Equity securities give owners transferable shares, access to more external capital and limited liability, unlike a sole proprietor who funds and runs the firm alone.
- Common shareholders hold economic rights (dividends, liquidation, conversion, split and preemptive rights) and voting rights, all in proportion to their holding unless the terms say otherwise.
- Equity has an indefinite life: it ends only through a restructuring (acquisition, divestiture), where holders get cash or other shares, or through liquidation.
- Customers' money pays suppliers, staff, lenders and government first; the net income left is retained or paid out as dividends, which may be regular, occasional or never.
- An equity investor's cash flows are the purchase price, any discretionary distributions, and a final price from a secondary-market sale, an acquisition or a liquidation.
- Dividend policy follows the company life cycle: start-ups and growth firms retain everything; mature firms with stable cash flows pay regular dividends.
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