Types of Equities
Equities, more commonly referred to as stocks, shape the nature of investment today,
with both corporations and individuals plunking cash down on what frequently amount to
educated bets that an investment in a paper share of ownership will one day be worth
more than it is at the time of purchase.
The fundamental purpose of an equity is to share ownership of a business in exchange
for liquid cash. Company owners typically raise needed cash, and lots of it, for capital
improvements and market expansion. This quick generation of liquid assets is done by
essentially selling a share of ownership in the given company to those who will buy the
shares. The selling of equities instead of outright selling title to the business allows the
company owners to raise the needed funds without, in theory, losing immediate control of the company itself.
The best case scenario for the business is one in which numerous buyers snap up the
shares, thereby diluting ownership percentage among many equity owners. If done right,
the original owners will retain a major percentage to always make sure they have a
majority ownership of equity. However, theory doesn't always match reality. Equity holders
get to have a say, even if miniscule in a company's direction. This ownership sharing is
performed by giving each share a vote. Obviously those with only a few shares are
outvoted all the time. However, stockholders who have a significant percentage or own half
the percentage total can make significant decisions for a company's direction, including
choosing its executive management.
Once a company decides to share its ownership for funds, it seeks out a broker. This broker essentially prepares the
documentation, checks all the criteria, and then issues the company's stock or equity to the primary market. The
primary market is almost always financial institutions that can purchase significant amounts of shares all at once.
These institutions then turn around and release these shares to the secondary market, which is essentially everybody
else. So when you buy stocks through your broker or online account, you are participating in that secondary market of
Equities serve as an investment in two ways. The first is what stocks are
traditionally bought for, their assumed increase in value over time. The investor
takes an educated risk that an equity bought for $10 per share today will be $20
per share in the future, thereby gaining $10 profit over the original cost (not
assuming fees or commissions). The buyer then plans to sell the stock and take
the profits of the investment.
The second method of investment involves equities that pay a dividend. Not all
stocks pay dividends but those that do can provide income for an investor over
time. Dividend-paying equities involve those stocks were the company shares
some of its quarterly profits with all shareholders. This income is taken after all
company expenses are accounted for and then broken down by the number of
shares. The profit usually averages a couple of pennies per share. However, for
those who have quite a number of shares, the dividend payments each quarter
can start to add up over time.
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