Lesson 7 of 8 · All lessons in this module
- Equity versus debt, why companies issue shares, and equity in global markets
- Common shares: voting rights, share classes, callable and putable shares
- Preference shares: cumulative, participating and convertibleVideo lesson
- Integrated cases: share classes, control and the liquidation ladder
- Private versus public equity: venture capital, buyouts and PIPEs
- Investing in foreign equity: direct, depository receipts, GRS and BLDRs
- Risk and return of different equity securities
- Book value, market value, ROE and the cost of equityVideo lesson
Lesson 7 of 8 · 12 min
Risk and return of different equity securities
An equity's return is price change plus dividends (plus currency moves abroad); its risk is the uncertainty of that total return, which features like preference, cumulation, calls and puts raise or lower.
In short
- Total return = (price change + dividend) ÷ beginning price: .
- Young firms usually pay no dividends (return = price change only); mature firms return cash through dividends or buybacks.
- For foreign shares or DRs, currency is a third source: a rising foreign currency adds to the return, a falling one subtracts.
- Reinvested dividends compound and dominate long-run equity wealth.
- Risk = uncertainty of future total return (of cash flows), usually measured by the standard deviation of total return, from history or from scenario probabilities.
- Preference shares are less risky (and earn less) than common. Putable < non-callable < callable in risk; cumulative < non-cumulative.
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