Definition
The term common stock equivalent is used to describe a wide variety of securities and agreements that provide the holder with the right to receive or acquire common stock. Common stock equivalents can include securities such as stock options, warrants, grants, preferred stock, bonds, and contingent shares.
The value of these equivalents will often change with the market value of the company's common stock. These securities can also have a dilutive effect on the company's earnings per share.
Explanation
Companies issue common stock to raise capital. Purchasing shares of common stock typically provides the investor with the right to vote on certain corporate issues, share in the ownership of the company, and receive dividends. Generally, a common stock equivalent can fall into the following two categories:
Convertible Securities: includes preferred stock and bonds issued by the company that provide the investor with a conversion feature. These investments carry this feature to add to the marketability of the underlying security. Investors value preferred stock and bonds containing this feature because it provides them with the ability to enjoy the benefits of common stock without owning the security.
Employee Stock Option Plans: includes restricted as well as unrestricted stock options in addition to warrants and grants. These incentive compensation plans provide the employee with the opportunity to purchase shares at a discount or free of charge.
Once a security is classified as a common stock equivalent, it is used in the calculation of primary earnings per share if the securities are dilutive. Certain securities, such as convertible bonds, can be antidilutive and actually increase earnings per share.
Typically, a security would be classified as a stock equivalent when the market price per share is higher than the security's conversion price. When this occurs, the security will trade as if it's an equity issue, and its price will move in-step with the price of the common stock.
Related Terms
The term cost of common stock refers to a calculation that allows the investor-analyst to understand how expensive it is for a company to issue common stock. The cost of common stock is also one of three metrics used to calculate a company's cost of capital
Moneyzine EditorJanuary 12th, 2024- The term stock warrant is used to describe certificates that entitle the holder to purchase shares of common stock at a given price and within a prescribed timeframe. Stock warrants are frequently included as a feature on bonds or preferred stock issued by a company to increase investor interest and lower the cost of the bond or preferred stock.Moneyzine EditorNovember 6th, 2024
The term employee stock purchase plan refers to a non-compensatory program that allows employees to purchase common stock in their company through regular payroll deductions. An employee stock purchase plan, or ESPP, will typically allow employees to purchase stock at a discount that can be as high as 15%.Moneyzine EditorNovember 6th, 2024- The term stock compensation plans refers to a variety of programs that provide a select group of employees with the opportunity to share in the ownership of the company. Compensable stock option plans typically grant employees the right to purchase shares of common stock at an attractive price, or receive stock as part of a performance incentive plan.Moneyzine EditorNovember 6th, 2024
The term employee stock option plan refers to a compensation program that provides a select group of employees with the right to purchase a fixed number of shares of common stock at an attractive price and within a prescribed timeframe. Employee stock option plans can include both non-qualified stock options (NQSO) as well as incentive options.Moneyzine EditorNovember 6th, 2024- The term Section 83(b) elections refers to the Internal Revenue Code that allows individuals to immediately declare the excess of fair market value of property transferred to them as gross income in the current year. Section 83(b) elections are of particular importance to individuals receiving shares of restricted stock options.Moneyzine EditorNovember 6th, 2024
The term contingent issuance agreement is used to describe shares of common stock that will be issued by one company to another party if certain conditions are met. Contingent issuance agreements are sometimes used when one company acquires another, whereby the acquiring company might agree to issue additional shares of common stock if the acquired company achieved certain earnings targets.Moneyzine EditorNovember 6th, 2024- The term employee stock appreciation rights plans refers to compensation programs that provide a select group of employees with the ability to share in the increase in value of the company's stock without owning shares. In addition to enjoying the increase in the stock's value, phantom stock plans allow the employee to receive dividends too.Moneyzine EditorNovember 6th, 2024
