Equities, in the simplest terms, can be described as shares in the ownership of a company.
Equities, along with [bonds], are the most common means by which a company will raise finance from the markets. However, they differ from bonds, which are loans made to the company and do not constitute any ownership of the company at all, as a company will offer shares to investors which, in turn, give the buyer of the shares (the investor or trader) part ownership of the company.
Equities are listed on global stock markets and traded worldwide in the secondary market after they have been issued/sold by companies. There are millions of equities listed on [stock exchanges] worldwide including the FTSE in the UK, the Dow Jones and S&P 500 in the US, the CAC 40 in France, and the Nikkei 225in Japan to name just a few. Multi-national companies may even be listed on multiple stock exchanges, issuing equities in different currency denominations globally.
Investors, more often than not, buy equities as longer-term investments, hoping that the price of the stock will rise over several years. Commonly, equity investments are made as part of a diversified portfolio to help with long-term financial plans, such as retirement plans.
Investors will, however, receive dividends on the stock they hold. Companies usually make dividend payments on an annual, but sometimes quarterly or bi-annual basis. The dividend will be based on company profits, and a specific amount per share will be allocated.
As an example, company X may announce an annual dividend of £1.50 per share, and if investor x owns 1,000 shares of the company, they will receive £1,500 (1,000 x £1.50) as a dividend payment.
While investors will seek the longer-term investment, traders may look to buy or sell equities over short-term periods looking for quick movements in price which may occur as a result of several factors.
For example, a company could be set to release annual or quarterly profit figures which a trader believes are likely to be weak. Therefore, the trader may sell the equities of the company ([go short]) in the hope that the price will drop relatively quickly over a short period and they will then be able to buy the shares back at a cheaper price and bank good profits.
Conversely, a company may land a big contract and a trader may quickly buy ([go long]) some stock in the company expecting that the will price rise sharply over the coming days as news of the contract disseminates and demand for the company’s shares increase, after which the trader can then sell at a higher price and again bank some profits.
Key takeaways
- Equities, in their simplest form, give the holder part ownership of the company issuing the equity.
- Companies may issue equities in various currencies on different stock exchanges around the world.
- Investors will often invest in equities for longer-term periods as part of a diversified investment portfolio.
- Traders may take shorter equity trades, hoping to take profits after specific news events involving companies.