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• What are equities?

• What are common shares?

• What are preferred shares?

• Why should I invest in equities?

• Are there risks involved with equities?

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What are equities?

 

Equities are pieces of a company, also known as "stocks." When you buy stocks or shares of a company, you're basically purchasing an ownership interest in that company. A company's stockholders or shareholders all have equity in the company or own a fractional portion of the whole company. They buy the stocks because they expect to profit when the company profits.

 

Companies issue two basic types of stock: common and preferred shares.

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What are common shares?

 

Both public and private corporations can issue common shares. Common shareholders are the owners of a company and initially provide the equity capital to start the business. Common share ownership in a public company offers many benefits to investors. The following are some of its main advantages:

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• Capital appreciation

• Dividends

• Voting

• shares can easily be bought or sold

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There are also drawbacks to owning common shares. Although common shareholders are in a relatively weak position, as senior creditors, bondholders and preferred shareholders all have prior claims on the earnings and assets of a company. While interest payments are guaranteed to bondholders, dividends are payable to shareholders at the discretion of the directors of a company.

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What are preferred shares?

 

Preferred stock is a class of share capital that generally entitles shareholders to fixed dividends ahead of the company's common shares and to a stated dollar value per share in the event of liquidation. Typically, the preferred shareholder occupies a position between that of a company's creditors and its common shareholders.

 

As preferred shares have characteristics of both debt and equity; they provide a link between the bond and common equity sections of a portfolio.

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Why should I invest in equities?

 

Equities have an important role to play within a properly diversified portfolio. They can help with building your savings, maximizing your income, and protecting your wealth:

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• Building your savings

  Historically, equities provide superior long-term returns compared to cash and fixed-income investments. However, equities fluctuate more in value. Because these fluctuations tend to smooth out over time, it’s important to take a long-term perspective when investing in equities. Just because a particular equity is down one year doesn’t mean it will be down in 10 years. The key is to determine when it’s a temporary setback and when it’s a more serious problem.

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• Maximizing your income

  For an income-oriented investor, portfolios contain a high percentage of bonds. However, it’s important not to overlook the key role that equities can play in your portfolio. First, certain equities like income trusts can enhance your income. In addition, the income generated by equity investments, such as dividends or capital gains is taxed more favorably than interest income. Setting aside a certain percentage of your portfolio for equities can enhance your after-tax income.​

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Risks involved with equities?

 

Yes. Equity investments vary in their risk but are generally considered higher risk than cash-type investments or bonds.

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Equities offer growth of capital and dividends but you must endure the unpredictable ups and downs (risk) of the stock market. This is one of the many reasons equities are often more suitable for longer investing time horizons.