Investor Facts: What Is Equity?

Posted on May 25, 2017 at 1:15 PM PDT by

Equity is a synonym for an investment in a company through the purchase of stock.

Equity can be a complex idea, but it simply represents ownership. In investments, this usually is a fraction of a public corporation in the form of stock.

Companies raise money for their operations by issuing shares, or stock. The shares are sold on the stock market to investors. The company receives their cash in exchange.

Later, those same shares can be bought and sold by other investors via stock trading. Equity holders also may get income the company earns in the form of dividends.

equity

Ownership of a stock is ownership of a company in a real sense. If you were to buy enough stock, for instance, you eventually would find yourself in charge of management and operations.

Most people think of equity as the portion of their home they own outright vs. what you owe the bank on a mortgage.

If you buy a house for $100,000 and make a down payment of $20,000, you own 20% of the house. That’s your equity in the property.

Stock ownership is not that different. There are different classes of shares but most investors buy common stock. Those shares trade on the stock market. Their daily prices are quoted in the business news.

If you own shares of a big company your equity position can be quite small, just a few of tens of thousands of shares. Nevertheless, you really own that much of the company, with all of the rights that come with business ownership.

You can vote on matters before the board, for instance. Your vote is weighted according to how many shares you own, so don’t expect a lot of say. However, activist shareholders can and do sway management decisions.

Predictable income

Likewise, as a part owner in the business, you are entitled to income from earnings. Some companies do not issue dividends at all, preferring to reinvest into operations and expansion.

Many do, however, often those in mature industries where growth is slower but income is high and relatively predictable.

Owning stock is the basis of most long-term investment portfolios because companies are under great pressure to continually increase earnings. That impetus provides the kind of investment growth that outpaces inflation over long periods, creating wealth.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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