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What are equity investments and how do I get started?

Equity investments provide an opportunity for investors to earn passive income from the company they want to invest in. In this guide, you’ll learn about the different types of equity investments, the easy ways to invest in stock markets, key points about getting started and, of course, the advantages and disadvantages.

What is the meaning of equity investment?

An equity investment means you own part of an asset. In the case of a stock, you own part of a company. You could also have equity in your home, which is the difference between its value and how much you owe on your mortgage.

Having equity in a company means you own part of the profits of that company, you can vote at shareholder meetings and be entitled to dividends (cash payments to shareholders from the company).

For investors building a portfolio of assets, the most common form of equity investment is buying the shares of companies listed on a major stock exchange, such as the London or New York Stock Exchange.

What are the different types of equity investments?

Stocks

Most shares listed on stock exchanges are common shares. If you own common shares, you own part of the company. You can sell your shares on the stock exchange, receive dividends from the company and have voting rights. On average, large US companies (S&P 500 index) have returned 10% per year, according to data from Berkshire Hathaway, and large UK companies (FTSE 100 index) have returned near 8% per year.

Preferred shares are also listed on stock exchanges, but investors don’t have voting rights, and the shares are more like bonds than stocks.

Exchange-traded funds

An investor can also own equity in common shares through exchange-traded funds (ETFs)​ or index funds. You choose an index, find the right fund that tracks it and then buy shares in it either through the ETF or a broker. Some view ETFs as a relatively less complex way to invest since the fund will typically own a diversified group of stocks. ETFs also trade on the stock exchange (mutual funds do not), meaning you can buy and sell them when you please.

Private equity

Private equity is similar to common stock, except that it takes place outside of a stock exchange. For example, several investors may decide to fund a start-up, each providing funds or services in exchange for equity or a stake in the company. If you own private equity, it can be hard to sell since you need to find a buyer. With common shares, the stock exchange brings buyers and sellers together.

Venture capitalism

Venture capitalism is the method of investing in start-ups by providing cash or services in exchange for equity in the company. A venture capitalist may also provide loans in lieu of equity. If they have equity, they own part of the new company. If they only provide a loan, they don’t own part of the company but rather receive interest, and the loan will hopefully be paid back if the company does well.

Venture capitalists tend to invest in companies that are established but need money to grow, although some may invest in start-ups.

Crowd equity/crowdfunding

Crowd equity investing or crowdfunding is a new form of investment where a start-up or other business offers a product or service, and then people invest or pre-purchase products to help the company get off the ground. These deals can vary dramatically and are highly speculative since the company often isn’t up and running straight away.

Crowdfunding usually means you are just pre-buying a product or will receive bonuses for giving the company cash. Crowd equity funding means you receive equity or shares in the company. Once again, you will need to find someone to sell to if you want out of your investment.

Quoted vs unquoted equity investments: what’s the difference?

Quoted equity investments trade on stock exchanges, and there is a clear price. You can see at what price people are willing to buy and sell at and what the last transaction price was. If you own shares of common stocks that are on a major stock exchange, then your shares are quoted.

Unquoted equity investments mean the price is negotiable or unknown. If you own private equity, your shares are unquoted. The price you can sell for is what someone is willing to pay – you can negotiate to bring up their buy price, or they may try to get you to lower your sell price. In a quoted market, there is no negotiation. You take the price available, leave it, or wait for a different price.

Are equities a good investment?

Equities are good in that they are easily accessible and have provided favourable long-term returns between 8–10% in the UK and the US. They can be bought and sold through an online brokerage account, which is easy to set up. Common stocks can also be bought and sold with ease since the stock exchange brings together buyers and sellers in one location.

On the downside, there is a risk of loss. Buying equity in a company means your returns are based on how that company does. Newer companies tend to have lots of upside in their share price if they do well, but many new companies never make it and thus, part of the investment may be lost.

More established companies tend to have more stable stock prices (compared with new companies), pay dividends, but may have fewer long-term growth prospects than newer companies that are just starting to catch on.

See our guide to 20 of the best-performing long-term stocks​.

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Investing in debt vs equity: pros and cons

If you loan money to a company in the shape of a bond, you are essentially investing in debt. Companies issue bonds with a set face value, a certain amount of interest and a maturity date. If you buy that bond, you receive the prescribed interest each year until the maturity date. At maturity, the company pays back the face value of the bond that you bought.

Bonds issued by stable governments and companies tend to have less volatility than stocks. But the returns also tend to be lower, averaging near 5% over the long term​, according to Vanguard.

Many investors choose a mix of bonds and stocks in their portfolios. Bonds are more stable and provide regular cash flow. Stocks can provide more long-term upside potential but experience more volatility. Meanwhile, younger investors typically favour stocks over bonds. But many investors nearing retirement age prefer bonds over stocks in their portfolio, as they would prefer to avoid the volatility of stock markets.

Should I invest in equity funds?

Some investors choose to invest in individual stocks, but it requires many stocks to achieve a diversified portfolio. Others choose to invest in ETFs since they often hold 50 or more stocks in the ETF. Buying several equity funds means the investor may own a small piece of several hundred companies.

Buying ETFs tends to save on commission costs since diversification can be achieved with the purchase of just a few funds. Achieving diversification with individual stocks would require many transactions/trades. ETFs do charge a yearly service fee – the expense ratio – which covers the fund’s costs and services.

There are also many different types of funds. You can buy funds focused on certain stock sectors or industries, new companies, established companies, nationally or globally diversified, dividends and so on.

You can also invest in bond ETFs that hold many different bonds. This, too, tends to be easier than trying to buy many different individual bonds.

How to invest in equities

  1. Decide on a portfolio allocation. This is the percentage of the account you are going to put in stocks (or stock ETFs). Read more about how an investment portfolio works.
  2. Calculate what you are going to buy and how much. For example, if you have £100,000 and you decide to allocate 50% of it to stocks, pick which stock or stock ETFs you wish to buy with that capital.
  3. Monitor your investments. In your account or platform, see how they perform and if this aligns with your goals.
  4. Rebalance your portfolio if needed. If your investments underperform, you may want to reduce or increase the weight of a particular stock.
  5. Understand your risk tolerance. Do you prefer assets that provide smaller returns but also smaller declines, or do you prefer to try to make as much as possible in the short-term? This will help you to decide how much risk you want to take.

How do I conduct due diligence on equity investments?

Many buy-and-hold investors choose a passive approach​ by investing in broad-based index ETFs that track the S&P 500 and the FTSE 100. Often, they hold these funds into retirement.

When buying individual stocks, more due diligence is required.

  • Growth investors look for companies that are steadily growing their earnings and revenues, typically accompanied by a rising stock price.

  • Value investors look for companies with a strong balance sheet but where the stock is trading at a low valuation relative to its earnings or assets.

  • Financial ratios are commonly used to assess how healthy a company is, such as price-to-earnings, current ratio, debt/equity, inventory turnover and more. This is called fundamental or company analysis.

FAQs

Is equity investment an asset?

Yes, equities are an asset. They are something you own and that have value. The equities you own can increase or decrease in value and can be bought and sold on a major stock exchange.

What is an example of an equity investment?

Buying shares of a company, such as Apple (AAPL) or Vodafone (VOD), are examples of equity investments. By buying shares, you own a small piece of that company. You can cast votes on the company policies and receive dividends based on how many shares you own. Learn how to invest in stocks.


CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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