Understanding Equities

What Are Equities?

Equities, commonly known as stocks or shares, represent ownership in a company. When you buy equity, you become a part-owner of that business, entitled to a share of its profits and assets.

Types of Equity Securities

Ordinary Shares (Common Stock)

The most common type of equity:

• Voting rights at shareholder meetings
• Dividend eligibility (when declared)
• Last claim on assets in liquidation
• Unlimited upside potential

Preference Shares (Preferred Stock)

A hybrid between equity and debt:

• Fixed dividends paid before ordinary shares
• Priority claim on assets over ordinary shares
• Limited voting rights typically
• Less price volatility usually

How Equities Generate Returns

Capital Appreciation

Share prices can increase over time as:

• Company revenues and profits grow
• Market sentiment improves
• Industry sector performs well
• Economic conditions strengthen

Dividends

Companies may distribute profits to shareholders:

• Cash dividends: Direct payments
• Stock dividends: Additional shares
• Special dividends: One-time payments

Key Metrics to Understand

Price-to-Earnings (P/E) Ratio

P/E = Share Price / Earnings Per Share

Indicates how much investors pay for each £1 of earnings.

Dividend Yield

Yield = Annual Dividend / Share Price × 100

Shows the income return on your investment.

Market Capitalization

Market Cap = Share Price × Shares Outstanding

• Large Cap: £10bn+
• Mid Cap: £2bn - £10bn
• Small Cap: Under £2bn

Participating in Equity Offerings

Initial Public Offerings (IPOs)

When a private company sells shares to the public for the first time:

1. Company files prospectus
2. Price range determined
3. Retail investors indicate interest
4. Final price set
5. Shares allocated and trading begins

Rights Issues

Existing shareholders offered new shares:

• Usually at discount to market price
• Proportional to current holdings
• Can sell rights if not participating

Risks to Consider

1. Market Risk: Share prices can fall
2. Company Risk: Individual businesses can fail
3. Sector Risk: Entire industries can decline
4. Liquidity Risk: May be hard to sell quickly
5. Currency Risk: For international equities

Building an Equity Portfolio

Diversification is key:

• Spread across multiple companies
• Include different sectors
• Consider geographic diversity
• Balance growth and income

Summary

Equities offer ownership in companies and potential for both capital appreciation and income through dividends. Understanding the basics helps you make informed investment decisions.