when a residual security is converted or exercised it increases the number of current outstanding common shares this can dilute the total share pool and their price also dilution also affects financial analysis metrics such as earnings per share because a company s earnings have to be divided by a greater number of shares 
in contrast if a publicly traded company takes measures to reduce the total number of its outstanding shares the company is said to have consolidated them the net effect of this action is to increase the value of each individual share this is often done to attract more or larger investors such as mutual funds other types of securitiescertificated securities are those represented in physical paper form securities may also be held in the direct registration system which records shares of stock in book entry form in other words a transfer agent maintains the shares on the company s behalf without the need for physical certificates modern technology and policies have in most cases eliminated the need for certificates and for the issuer to maintain a complete security register a system has developed wherein issuers can deposit a single global certificate representing all outstanding securities into a universal depository known as the depository trust company dtc all securities traded through the dtc are held in electronic form it is important to note that certificated and un certificated securities do not differ in terms of the rights or privileges of the shareholder or issuer bearer securities are those that are negotiable and entitle the shareholder to the rights under the security they are transferred from investor to investor in certain cases by endorsement and delivery in terms of proprietary nature pre electronic bearer securities were always divided meaning each security constituted a separate asset legally distinct from others in the same issue depending on market practice divided security assets can be fungible or less commonly non fungible meaning that upon lending the borrower can return assets equivalent either to the original asset or to a specific identical asset at the end of the loan in some cases bearer securities may be used to aid tax evasion and thus can sometimes be viewed negatively by issuers shareholders and fiscal regulatory bodies alike they are rare in the united states registered securities bear the name of the holder and other necessary details maintained in a register by the issuer transfers of registered securities occur through amendments to the register registered debt securities are always undivided meaning the entire issue makes up one single asset with each security being a part of the whole undivided securities are fungible by nature secondary market shares are also always undivided letter securities are not registered with the sec and cannot be sold publicly in the marketplace a letter security also known as a restricted security letter stock or letter bond is sold directly by the issuer to the investor the term is derived from the sec requirement for an investment letter from the purchaser stating that the purchase is for investment purposes and is not intended for resale when changing hands these letters often require an sec form 4 cabinet securities are listed under a major financial exchange such as the nyse but are not actively traded held by an inactive investment crowd they are more likely to be a bond than a stock the cabinet refers to the physical place where bond orders were historically stored off of the trading floor the cabinets would typically hold limit orders and the orders were kept on hand until they expired or were executed issuing securities examplesconsider the case of xyz a successful startup interested in raising capital to spur its next stage of growth up until now the startup s ownership has been divided between its two founders it has a couple of options to access capital it can tap public markets by conducting an ipo or it can raise money by offering its shares to investors in a private placement the former method enables the company to generate more capital but it comes saddled with hefty fees and disclosure requirements in the latter method shares are traded on secondary markets and are not subject to public scrutiny both cases however involve the distribution of shares that dilute the stake of founders and confer ownership rights on investors this is an example of an equity security next consider a government interested in raising money to revive its economy it uses bonds debt securities to raise that amount promising regular payments to holders of the coupon finally look at the case of startup abc it raises money from private investors including family and friends the startup s founders offer their investors a convertible note that converts into shares of the startup at a later event most such events are funding events the note is essentially a debt security because it is a loan made by investors to the startup s founders at a later stage the note turns into equity in the form of a predefined number of shares that give a slice of the company to investors this is an example of a hybrid security 