Equities as a term is used in different topics, as such these have different definitions in different contexts. For the purpose of this article, we will be focussing on what equities mean in relation to the stock market and stocks traded on stock exchanges such as the London Stock Exchange, the New York Stock Exchange, and the Australian Stock Exchange, to name a few.
What are equities in relation to stocks and shares?
When you buy or sell stocks and shares, you are essentially buying or selling a portion of ownership of a publicly listed company. Equities are the parts of the company that you now own. The value of these equities increase and decrease depending on how well the company is performing, and you earn money from this by selling the shares for more than you bought them for, capitalising on the difference. The profit from this buying and selling activity is called “Capital Gains”.
An equity share, essentially another term for ordinary share, is the maximum amount of liability that the company would have to its’ shareholders when totalled up. Total equity represents the figure that would be divided up amongst equities holders in the instance of a takeover or collapse.
If you have a company with value of £250 million, with 40% of the company being listed as ordinary shares, total shareholder equity is £100million (40% of £250million). If there are 1million ordinary shares in issue, the value of each equity share would be £100. Shareholder equity may not equal the full value of the company, as they may not make the full company available to the public exchanges, therefore the remainder of the shares would be held outside of this equity value.
Essentially then, when you see the term equities bandied about in reference to shared, it is simply referring to an ordinary share. The value that would be returned to shareholders in the event that a company is liquidated (after debts) then, would be the equity.
Why do companies list themselves on the stock market, or a more colloquial term; Why do companies choose to “Go Public”?
There are many reasons why privately owned companies would choose to give up part of the ownership of their company and allow the public to buy stocks in the company.
One of the most common reasons would be to raise funds for expansion, allowing the company access to substantial capital boost to enable them to invest in new infrastructure, or new projects to increase profitability. They may also want to use this upfront capital to pay off existing debts and liabilities.
By allowing the general public to buy portions of ownership at a price that reflects the value of the company, the owners are able to raise a significant amount of upfront capital. This can often run into thousands or millions if the company listed is valued highly on the stock exchange.
As a trader, it would be a great opportunity to exploit companies that have been newly added to the stock exchange, and as they rapidly expand and grow using the newly acquired capital. The value of your stock will grow with the value of the company, giving you high capital gains. As with all trading, there is a certain element of risk that comes with trading equities, but done correctly can lead to large returns.
Leveraged Equities or Long Term Investing?
Trading stocks and shares are often seen as a “get rich quick strategy” but this is not the way that most smart investors look at equities. Although this statement itself is not completely untrue, the steps to reach the desired financial returns can be treacherous if not navigated correctly.
Leveraged equities can definitely get you to your goals a lot quicker, but the risks are also amplified. As mentioned throughout Leverage Forex, like all other financial trading, there are inherent risks involved, and not all trades will be successful.
When trading leveraged equities, you are essentially using the money of the broker to amplify the number of stocks you are holding, for the same trade value. This is similar to how companies themselves leverage the stock market to gain a greater pool of investment capital on which to expand.
The famous phrase “You win some, you lose some” springs to mind when discussing trading in the short-term. The long term equities investors such as Warren Buffett have built their portfolios by only investing in companies that they believe in for the long-term. This may work for some, but doesn’t usually fulfil the need of pure traders.
With equities investments, it is always worth bearing in mind that market movements do not represent profits and losses in real-terms. Not until you actualise these returns by selling your shares. Therefore if you are still holding onto your stocks, there is no actual profit or loss, only ‘paper profits or losses’.
Long term equity investment is usually done via a stock broker, as you would not want to be incurring overnight fees or margin costs over any extended period via leveraged equities. If you are planning to hold long term, avoid leverage completely.
When looking for stock brokers with minimal costs, you may want to try one of the online brokers that have brought this to the market without any transaction fees such as eToro, or Admiral Markets.
Trade with or without leverage at eToro. New markets and exchanges being added to the commission free real stocks offer including UK, Australia, and more.
Short-Term Equities Trading
If you are interested in trading stocks for the short-term, you may want to try your hand at leveraged equities via CFDs or Spread Betting.
This gives the added advantage of being able to trade with more capital than you have in your trading account, with the added risks and rewards that such trading offers.
Typically, you will find leveraged equities available within your broker account up to 1:5 in Europe, or 1:25 in the rest of the CFD trading World.
Leveraged equities have been gaining in popularity in recent years and represents a very flexible way to participate in the rise and fall of a company.
You can also trade against a company by selling their equities as a CFD without having initial ownership. This gives you great flexibility in terms of your trading options.
Brokers offering short-term and leveraged equities CFD trading on stocks are quite varied depending on the exchange the shares you are looking to trade is listed on. The below brokers will give you some great variation if this is the type of equities trading you are considering.
Up to 2000 instruments, 23 major exchanges, and 1:5 leverage for stocks. You will find almost all major equities available for trade with Plus500
More than 100 different major stocks tradeable from the largest exchanges with Internationally regulated Avatrade. 1:5 leverage and free demo account available.
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