What are Equities?
Equities are a type of security that represents ownership in a company, just like stocks and bonds. There are also two main types of equities: common shares which represent ownership in the company and preferred shares which provide dividend payments as well as some protection in the event of bankruptcy. According to Fintalent’s equities consultants, preferred shares come with fixed or floating dividends, meaning the dividends are fixed for certain period or can vary up or down with the company’s earnings.
Shares can be considered risky because they typically have no guaranteed return and may experience price volatility over time – however, higher risk equities have historically been associated with higher returns over time under many different market conditions. The share price can also vary due to changes in market sentiment, business performance, general economic conditions and political environment.
Equities are created when companies issue new shares into the market. Equities represent ownership interest in a corporation. Investors buy equities like any other investment or commodity to profit from its price changes or dividends received over time. There is no guarantee that they will receive those dividends or profits back in cash though!
The role of equity is to be the creators and holders of corporate wealth, while debt is its opposite – it creates debts which become obligations owed to creditors and shareholders respectively (or other parties).
The most common means of payment is in cash or cash equivalents. Other forms of payment can include bank transfers, credit/debit cards and checks.
To buy and sell such a stock, you must open an account with a broker. There are four large categories of equity trading: initial public offerings, secondary trading, direct purchases from the company itself, and swaps. Usually IPOs are more risky because they lack an established track record. Secondary trading involves buying stocks from someone who already owns them. Direct purchasing requires one to buy the stocks directly from the issuing companies; however, this can only be done if you have a substantial amount to invest (sometimes millions or billions of dollars). Finally, swaps are financial transactions that allow one to trade the purchase or sale of a stock without actually owning it outright.
Investors can also go deep into debt. A credit default swap is a type of derivative (financial instrument) used to insure against declining credit ratings: if a borrower defaults on its debt obligations, the CDS issuer will take over payment for the loan as long as payment is made within three to five days.
Buying a bond means that you buy an IOU from someone else. You loan him money and receive interest on this loan for an agreed period of time; once you have been paid back, you no longer own the bond and must turn it over to the original lender.
Although the company is responsible for repaying the principal amount of a loan to bondholders, it is not accountable for paying the earnings per share (EPS) to common shareholders. Investors in common shares have a direct interest in the success of a company because they share in earnings of equities through dividends. Dividends are payments made by companies out of their profits that are paid to shareholders, which can be straight cash or stock. Earnings per share (EPS) is often used as a gauge to determine how successful a company has performed and whether it is worthy of investment by shareholders. In the event of a company’s bankruptcy, bondholders are repaid before shareholders can normally collect any distributions.
The intrinsic value of an equity is the total present value of its dividends going forward. Intrinsic value is the fundamental concept in the valuation of equities that incorporates the entire stream of future dividends and discounting it back to today’s dollars. It is usually quoted in a multiple of earnings or cash flows rather than in dollar terms. Intrinsic value is particularly useful when the quoted price of an equity is less than its intrinsic value.
The capital market line (CML) is a plot of the relationship between risk and return. The CML is a graph that shows the efficient frontier (which represents the optimal portfolio diversification that allows a portfolio to have maximum return for each level of expected volatility) and the securities that occupy it. All securities are plotted on a CML diagram with the x-axis representing risk and the y-axis representing return. Securities below the line represent those with lower expected returns given their levels of risk, while securities above represent securities with higher expected returns given their levels of risk.
The correlation of return between two risky assets is a measure of the degree to which their returns are related. Correlation coefficients are between -1 and 1, with -1 implying that the returns move in opposite directions, 0 implying no relationship between the returns, and 1 implying that their returns move exactly in the same direction. The more positively correlated two assets are (e.g. 0.5 or higher), the more diversification is achieved when paired together in a portfolio compared to those assets with negative correlation (e.g -0.5 or below) which tend to be oppositely related and therefore create diversification in portfolios when combined, partially because they counteract each other’s volatility effects on portfolio variance and therefore risk.
The more positively correlated two assets are (e.g. 0.5 or higher), the more diversification is achieved when paired together in a portfolio compared to those assets with negative correlation (e.g -0.5 or below) which tend to be oppositely related and therefore create diversification in portfolios when combined, partially because they counteract each other’s volatility effects on portfolio variance and therefore risk.
The Sharpe ratio is a measure of the reward-to-variability ratio. It is constructed by dividing the return by the standard deviation of returns over a specific time period. The idea behind the Sharpe ratio is that a high level of return should be associated with a low level of volatility, leading to potentially reduced risk and greater profits.
