An equity security is a financial instrument that represents an ownership share in a corporation. The instrument also gives its holder the right to a proportion of the earnings of the issuing organization. The typical equity security is common stock, which also gives its owner the right to a share of the residual value of the issuing entity, in the event of a liquidation. A less-common equity security is preferred stock, which may also provide its owner with a periodic dividend, along with other rights that give it a priority interest over the holders of common stock.
A variation on the equity security concept is the stock option and the warrant; both instruments give their holders the right, but not the obligation, to acquire shares in a corporation at a certain price, and over a pre-determined period of time.
Equity securities also give their holders varying levels of voting rights in regard to certain matters, such as the appointment of a board of directors that then acts on behalf of the shareholders. A sufficiently large amount of ownership of equity securities will give the owner voting control over a business.
Depending on the restrictions noted on the face or back of a stock certificate, it may be possible to sell shares to a third party.
Only corporations issue equity securities. They are not issued by non-profit entities, partnerships, or sole proprietorships.