What are Equities?
Equities are shares issued by a company which represent ownership in the company. Ownership of property, usually in the form of common stocks, as distinguished from fixed-income securities such as bonds or mortgages. Stock funds may vary depending on the fund’s investment objective.
Equities vs. Stocks
While often used interchangeably, the terms “equities” and “stocks” actually refer to slightly different things. Essentially, a “stock” is one of the most common types of equity, with “equity” referring to the general concept of ownership.
What are Examples of Equities?
Some of the most common forms of equity include:
- Common stock
- Preferred stock
- Additional paid-in capital
- Treasury stock
- Accumulated other comprehensive income / loss
- Retained earnings
How to Invest in Equity
Though not all equities exist in the form of stocks, they are the most common form of equity ownership in the United States, with just over half of Americans reporting ownership of stock over the past decade. Investment in stocks can either occur by purchasing individual stocks or through investment in mutual funds, ETFs, or index funds. Access to stocks and other equity vehicles can be found either through employer-sponsored retirement accounts such as a 401(k) or 403(b) account or by opening a brokerage account with a fund provider such as Charles Schwab, Vanguard, or Fidelity.
What to Consider When Investing in Equities
When choosing to invest in equities, it is important to make your selections based upon both your time horizon and an understanding of your personal risk tolerance. The value of equities fluctuates daily with market movement, and so while it does offer the ability to appreciate over time, equities can also experience short-term downturns. Because of this, your personal time horizon softens any negative impact of equity holdings. Allowing your investment to grow over time (for instance, at least ten years) means some market instability can be endured.
If you find that short-term fluctuations in the market are hard for you to handle, either financially or psychologically, Then it is important to limit your portfolio’s exposure to equity. This can be done through both diversification and rebalancing. Diversification introduces a wide variety of investment choices into your portfolio to avoid the downside of any one investment too fully, while rebalancing is a periodic adjustment in your portfolio to avoid it being weighted too heavily toward volatile equity investments.