What are equities?
Equities (also known as stocks and shares) represent the fractional ownership of a company. When corporations are publically owned, they will be listed on a stock exchange where their shares can be bought and sold by private investors.
Private investors and investment companies will take ownership of equities. This gives them certain rights in the company they are part-owner of, including:
- the right to attend and vote at shareholder meetings
- the right to any dividend payments
- the right to own part of the company (shareholder’s assets)
Private investors will tend to own several equities, meaning that they have part ownership of more than one company. This is referred to as a portfolio of equities.
When looking at trading, the terms “equities”, “stocks” and “shares” are essentially interchangeable and mean the same thing.
Equity Markets
Equity markets are a meeting point for buyers and sellers of shares in public companies.
Historically, these meeting points took place physically at a stock exchange, with an open outcry system of trading. However, more recently, markets are increasingly adapting to electronically traded systems, allowing for decentralised trading.
It has resulted in traders from around the world being able to take part in the market.
Ways to trade and invest in equities
There is a difference between trading in equities and investing in equities. It all depends on how long you are looking to hold the position.
- Trading in equities involves taking a short-term view of the outlook for a stock.
This is done most cheaply and efficiently through the use of equity derivatives (CFDs and spread betting).
Equity derivatives are synthetic investment products that do not confer any of the rights that a shareholder has. Although they are still eligible for dividend payments these are accounted for in the trading platform and do not come from the company.
- Investing in equities involves a longer-term view of the stock.
Equity investing tends to involve taking ownership of the company. This is usually done by becoming a shareholder in the company through either single equity positions or via a fund.
Here are a few ways that trading and investing in equities is done:
- Trading equity CFDs: Contracts For Difference allow short-term speculation on equities. CFDs can be bought and sold to take advantage of near-term price fluctuations.
- Trading via spread betting: Spread betting is similar to CFDs. Traders speculate on whether the price will move higher or lower. Trading in pounds or dollars per point allows positions to be leveraged.
- Investing in the shares: This is the purest form of owning equities. Buying the shares through a stockbroker to take a longer-term position in the company.
- Investing in equity ETFs: Exchange Traded Funds have become an increasingly popular way to invest in equities. The fund invests in a basket of equities depending upon various investment characteristics. The ETF investor becomes an owner of several equities.
The benefits and risks of equities
Here are a few pros and cons that should be considered before trading or investing in equities.
Pros:
- Dividends provide extra income – Owning equities means that you are in line for dividend payments. This means that not only can you profit if the share price rises, but you can also receive income payments too. If the price falls, the dividend payments can also act as a buffer for any losses.
- Plenty to choose from – There are hundreds (or possibly thousands) of equities to choose from. You can tailor a portfolio according to your risk requirements. You can go for large cap or small cap equities. You could own defensive high-yielding value stocks or more volatile growth stocks. The choice is yours.
Cons:
- An ocean of research material to wade through – To make an informed investment decision, it can take hours of painstaking research before making a decision.
- Volatility of share price moves – Equities can swing wildly in value. This means that trading leveraged products such as equity CFDs can be an extremely high-risk investment strategy.
- The risk of a company going bust – Individual companies can and sometimes do go bust. Share prices can plummet quickly. Investments can lose their value fast.
