What Does It Mean to Invest in Equities?

If you’ve ever invested in the stock market, you’ve invested in equities.

So, Stocks and Equities Are The Same Thing?

Depending on context, equity can have a few different definitions. But when it comes to the market, equity is just a fancy term for shares, as in shares of stock. In other words, when companies offer equities, they’re offering you a share in the business – part ownership in a sense. You might also get or earn equity as a new hire.

Equities don’t pay fixed interest and therefore aren’t a guaranteed source of income – they do have risk. But they also come with great return potential.

If you’ve ever heard the term equity exposure, it’s basically how “exposed” you are to risk. How much money could you lose if the stocks you own lose value? How much can you afford to lose?

What Are Examples of Equity Investments?

Equity investments typically mean investments in shares of stock or even mutual funds which are pools of stocks that you can buy all at once.

• Shares
• Mutual funds

The following would not be considered equity investments.

• Derivatives
• Arbitrage
• Alternative investments

Let’s take a look at these more closely.

Shares

The first stock shares were issued over 400 years ago when the Dutch East India Company offered them as a means of enhancing trade.

Shares offer shareholders a piece of the company, or partial ownership. Upon profit declaration, the company distributes a portion to each shareholder proportionate to their holding.

Mutual funds

These are investments created by the pooling of investors’ funds which are then invested in various assets.

Equity mutual funds are primarily invested in market securities. Mutual funds are perfect for the investor who doesn’t have much market knowledge or the time to learn.

Derivatives

In the regular cash market, equities are “buy and sell”. But investors can also trade the derivatives market. Derivatives are securities deriving value from the asset itself – its future potential or lack thereof – also known as futures and options.

These contracts let investors buy and sell the related stock at current prices but to then defer delivery to a mutually agreed upon date. In fact, when it comes to futures derivatives, both buyer and seller must execute the contract upon the date decided at time of sale/purchase.

The difference between futures derivatives and options derivatives is that, in the case of options contracts, the buyer has the right to execute the contract at the agreed price anytime in the contract’s duration but is not legally obligated to do so.

Arbitrage

Quite possibly one of the longest trading strategies in existence, arbitrage takes advantage of market differentials.

It allows the purchase of stock on one exchange and the immediate sale of that same stock on a different exchange, exploiting the market differences. For instance, a trader could purchase a share for $20.00 on the NYSE, and then immediately sell it for the price its trading at – say, $25.00 – on the Canadian TSX, profiting $5.00 on each share.

In a perfect market with appropriate pricing, arbitrage would be impossible.

Alternative investments

The top types of alternative investments include such items as:

• Hedge funds
• Angel investments
• Real estate investment trusts, or REITs
• Infrastructure funds

These are also some of the world’s riskiest investment classes – but they also can provide some of the highest returns.

How to Get Started Investing in Equities

Aside from some of the more obvious steps, such as opening brokerage accounts, depositing money, and starting to buy and sell, there are other important steps you should consider.

First, what are your goals? What do you hope to accomplish with equity investing?

Next, start saving money you’ll use just for investments.

If you haven’t already, consider opening an IRA, or retirement account.

Then, find a trusted, inexpensive online investing service and start trading either mutual funds or ETFs (exchange traded funds).

Stick to index funds as you learn the ropes. You might even find you enjoy this rather no-nonsense approach to investing. One of the more popular index funds, the Standard & Poor (or S&P) 500, tracks the stocks of 500 large companies.

In 2020, the S&P had its worst showing since 2008 and the collapse of the housing bubble. But over the past couple months the market rebounded significantly. The S&P bounced back, recovering losses and turning positive. Index trading is still one of the safest means of investing.

Be smart and consider dollar to cost averaging. Don’t invest all your nest eggs at once, in other words. Instead, consider spreading your investment dollars out, such as allocating a certain amount of your monthly income as investment dollars.

If you’re already trading, now’s the time to consider learning more about stocks, bonds, and other investment opportunities. If you’ve already got an online investment account, that’s good – but there’s a lot more to trading and a lot more money you could be making by learning beyond the basics.

Finally, you shouldn’t go all-in all at once, as mentioned above – but you also don’t want to invest everything in just one industry either.

For instance, consider investing some in the tech industry and some in retail. And while it may be on hiatus now, travel could even become a good investment sector again – eventually, people will return to travel. If you bought into travel stocks now, you could be sitting on a fortune in a few years or so.

How Much Should I Have in Equities?

Analysts used to say the rule to follow in investment percentages was to subtract your age from a hundred. The remainder is the percentage of your portfolio that should be equities. For instance, if you’re 40, 60% of your portfolio should be equities.

But today’s healthcare technology has lengthened the average lifespan, so some financial advisors say you should subtract your age from 115 or so. This is an effort to help you help your money last longer and continue to grow – which equities can provide.

Are Equities a Safe Investment?

All investments have a certain amount of risk attached. Some people play the investment field only when it feels right. For instance, when Zoom shares took off, inexperienced investors sunk their teeth in and bought.

But economic downturns can happen, and with a downturn comes panic – and panic selling. Buying high and selling low defeats the purpose of investments.

To invest and really be at the top of your game, a financial advisor can help you navigate the markets – and your personal finances – to help you build a portfolio that’s well-rounded and works for you.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.