What are Equities?
Equities, in the simplest terms, can be described as shares in the ownership of a company. When you purchase equities, you essentially buy a stake in the company, making you a part-owner. This concept distinguishes equities from other financial instruments such as bonds, which are essentially loans made to a company and do not confer any ownership rights.
How do Companies Use Equities to Raise Finance?
Companies raise finance from the markets through equities and bonds, but the two function differently. Equities represent ownership, while bonds are a form of debt where the company borrows funds from investors with the promise of repayment with interest. When a company issues equities, they offer shares to investors. These shares then give the investors part ownership of the company, entitling them to a portion of the company’s profits and assets.
Where are Equities Traded?
Equities are listed on global stock markets and traded worldwide in the secondary market after they have been initially issued by companies. There are millions of equities listed on stock exchanges such as the FTSE in the UK, the Dow Jones and S&P 500 in the US, the CAC 40 in France, and the Nikkei 225 in Japan, among others. Multi-national companies might even be listed on multiple stock exchanges, issuing equities in various currency denominations globally, which allows them to tap into a broader investor base.
Why do Investors Buy Equities?
Investors often buy equities as long-term investments, with the hope that the price of the stock will appreciate over several years. Equity investments are typically a part of a diversified portfolio to help achieve long-term financial goals, such as retirement plans. The idea is to spread risk across various assets to mitigate potential losses.
What are Dividends?
Investors in equities also receive dividends, which are a portion of the company’s profits distributed to shareholders. Companies usually make dividend payments annually, but some may opt for quarterly or bi-annual distributions. The amount of dividend is often based on the company’s profitability. For example, if Company X announces an annual dividend of £1.50 per share, and Investor Y owns 1,000 shares, Investor Y will receive £1,500 as a dividend payment (1,000 shares x £1.50 per share).
How do Traders Approach Equities?
While investors generally look at equities for long-term gains, traders take a shorter-term view, buying or selling equities based on anticipated price movements. Traders capitalize on quick price changes that may result from various factors such as company announcements, economic data releases, or geopolitical events.
Example of Trading Equities
Let’s consider an example: A company is about to release its quarterly profit figures. If a trader believes that the figures will be weak, they might sell the equities of the company (a strategy known as “going short”) in the hope that the price will drop quickly. They can then buy back the shares at a lower price, making a profit from the difference.
Conversely, if a company secures a significant contract, a trader might quickly buy (or “go long”) shares of the company, expecting the stock price to rise sharply as the news spreads. Once the price increases, the trader can sell the shares at a higher price, thus banking a profit.
What are the Key Takeaways?
- Equities give the holder part ownership of the company issuing the equity.
- Companies may issue equities in various currencies on different stock exchanges worldwide.
- Investors often invest in equities for longer-term periods as part of a diversified investment portfolio.
- Traders take shorter equity trades, hoping to take profits after specific news events involving companies.
Understanding equities, their role in financial markets, and the different strategies used by investors and traders is crucial for anyone looking to enter the world of trading. With this foundational knowledge, you can make more informed decisions and develop a strategy that aligns with your financial goals.
