This lesson examines equity instruments, including common and preferred stock. It covers the characteristics, rights, and valuation of equity securities, as well as the role of equity markets in corporate finance .

• Common Stock: Common stock represents ownership in a corporation, offering voting rights, residual claims on earnings and assets, and the potential for capital appreciation. Common shareholders elect the board of directors and vote on major corporate matters. The University of Bologna course lists equities as a key financial instrument .

• Preferred Stock: Preferred stock provides fixed dividends and priority over common stock in liquidation but typically lacks voting rights. Preferred dividends are usually cumulative, meaning any missed dividends must be paid before common dividends can be resumed.

• Equity Valuation Models: The value of equity is determined by the present value of expected future cash flows. Key valuation models include:

  • Dividend Discount Model (DDM): Values stock based on expected future dividends.

  • Free Cash Flow to Equity (FCFE): Values stock based on cash flows available to equity holders.

  • Relative Valuation: Uses valuation multiples such as Price-to-Earnings (P/E) and Price-to-Book (P/B).

• Stock Markets and Trading: Stock markets include major exchanges (NYSE, NASDAQ, Euronext) and OTC markets. The Polytechnic of Santarém course covers equities and bonds as part of the syllabus .

• Shareholder Rights and Corporate Control: Equity ownership provides shareholders with the right to vote on board elections, mergers, and other major corporate actions. This control mechanism is central to corporate governance and the agency problem.