Equities
Equities are growth investments, and can include things like real estate and gold. But the most popular equity investments are stocks.
What Is a Stock?
A stock is a unit of ownership in a company. Companies can raise money in two ways. They can borrow your money by issuing debt (bonds). Or they can sell equity in the company by issuing shares (stocks).
How Do Stocks Work?
When a company issues stock, it basically divides itself into little pieces. Those pieces are sold to investors.
When you buy a stock, you become one of the owners (shareholders) of the company. As such, you are normally entitled to share in its profits and vote at annual shareholder meetings. When the company makes money, it distributes some of these profits to the shareholders. These profit distributions are called dividends. The rest of the earnings get reinvested in the company, to fund projects that hopefully increase the value of the company.
If the company doesn't report any profits, you won't get any dividends. If the company starts to lose money, you aren't on the hook for any of its debts. (You don't incur any personal liability. Your liability is limited to the amount you paid for your stock.)
All About Equities
Stocks are traded through stock exchanges. The largest one in the world is the New York Stock Exchange (the NYSE) where more than 700 million shares change hands each day. In Canada, the Toronto Stock Exchange (TSE) is the largest, with just under $4 billion in shares traded daily
If you want to buy or sell a stock on a stock exchange, you typically go through a stockbroker (or discount broker). In the movies and on television, brokers can be portrayed as real "wheeler dealers." But they're really just people who match up buyers and sellers.
Making Money From Stocks
You can make money from stocks in two ways:
- dividends paid on your stock
Although dividends are sometimes regular and predictable, companies are not obliged to pay them. And dividends can dry up if a company's profits start to sag, or if the company chooses to reinvest its profits rather than distribute them.
- sell the stock for more than you paid
This is the classic "buy low, sell high" principle. Stock prices go up when there are more buyers than sellers. Along with investor demand, the company's earnings and prospects, media attention, and the expectation of new developments may influence a stock's price.
When you sell a stock for more than you paid, your capital gain (profit) is the difference between what you paid and what you sold it for.
So if you buy a stock for $20, and sell it for $25, you'll have a $5 capital gain. On the other hand, if you sell your $20 stock for $15, you'll have a $5 capital loss.
Equity Mutual Funds
Equity mutual funds, like bond funds, enable many people to pool their money together and hand it over to a professional money manager who in turn invests in stocks. They are an easy and efficient way for smaller investors to participate in the growth potential of the equity markets.
It can be costly to invest in a portfolio of quality stocks on your own. Some equity mutual funds enable investors to invest in a diversified portfolio of stocks with as little as $25 each month.
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