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Equity Securities Defined

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Equity security is the formal term for stock in a publicly traded company. When you hear the word "equity" it means ownership, which is what a share of stock represents. Similarly, bonds are always equated with the word "debt." The word "security" references either stocks or bonds. It is defined as the evidence of ownership in the case of stocks, and evidence of debt in the case of bonds. Thus, stocks are an equity security while bonds are a debt security.

There are three types of stocks: common, preferred, or convertible. As the name says, common stock is the most common type of equity security. The term common stock is used for any equity security that has no special dividend rights and has the lowest priority claim in the event of bankruptcy. Owners of preferred stock, in contrast, usually receive preferred treatment when it comes to receiving dividends of cash payoffs in bankruptcy. There are also convertible securities that start as one type but can be converted into another if the investor desires. Most convertible securities are preferred stock or bonds that are convertible into common stock.