Although we take it for granted today, it’s remarkable that we, as individual investors, can own interests in companies all around the world, for minimal cost.
What makes that possible? Equity investing—the buying and selling of company stocks for profit.
Today, the potential for this type of investing is endless. Some 60 stock markets exist globally, from Thailand, Mongolia, and Zimbabwe, to Ecuador, and the Cayman Islands, hosting tens of thousands of companies, across all business sectors.
You have a choice of investment types and a range of approaches to how you invest in a company’s stock.
Let’s take a look.
You’ve heard the terms “sweat equity,” and “home equity,” which refer to different ways to gain value.
“Equity investing” is another way to gain value. An investor buys ownership interests in companies (i.e. stocks, shares, or equities) hoping to make money by receiving dividends through company profit distributions, and/or by reselling their shares for a profit.
The stock market is the transaction point for companies selling their stock to raise money for growth, and investors seeking money-making opportunities.
What are the benefits of investing in equities?
First, it has a low entry cost. You can invest in whichever company you choose for the price of one share. And, some brokerage firms, including Fidelity Investments, and investing and trading apps, like Robinhood, allow you to buy a fractional share of a company for as little as one dollar.
Investing in equities can provide large capital gains in a short amount of time, if a company becomes valuable quickly. According to the WallStreetMojo editorial team, in their article Equity Investment, “Profit yield from capital gain is much higher in equity investments than in other investments.” These investments may also pay annual dividends and interest.
Investing in equities also allows you to spread out your risk of loss. You can diversify your portfolio by investing in a variety of companies and different types of sectors or industries.
Finally, equity shares are “liquid,” meaning you can generally buy and sell them with ease. Stockbrokers and brokerage houses can help you with your stock transactions.
We’ve listed some of the most common ways to invest in equities below. These approaches are fluid and may be used alone, or in combination with one another.
Widely used and easy to buy and sell, purchasing a company’s common stock makes you a “shareholder,” with voting rights in major company decisions.
Preferred equity stock is less prevalent than common stock. It gives shareholders priority status over common shareholders (although they carry no voting rights). They often provide regular cash distributions and fixed payments, and so may carry less risk.
Equity Mutual Funds are one option for investors who don’t have the time or expertise to research which companies make the best investments. Professional investment managers handle these big pools of money, from lots of investors, put into a host of companies.
Exchange Traded Funds (ETFs) are another option for investors who want a simple solution for finding well-performing stocks. These funds are generally “passively” managed to perform to the level of a certain standard (like the S&P 500).
Index funds are similar to ETFs, although you can only trade them at the end of the day, whereas you can trade ETFs throughout the day. In addition, according to NerdWallet, “...ETFs may also have lower minimum investments and be more tax-efficient than most Index funds.”
For a comparison of mutual funds to index funds, this NerdWallet article, “Index Funds vs. Mutual Funds,” is helpful. For a comparison of ETFs to index funds, take a look at this NerdWallet article, “Index Fund vs. ETF: What’s the Difference.”
Not all companies raise money by being publicly traded on a stock exchange. Some privately held companies raise money for growth through “private equity” transactions, which can involve investors and/or private equity funds.
Private equity is considered an alternative investment class. It may be administered through large private equity funds, like Blackstone, KKR & Co. and Carlyle Group, or by an alternative investment company like Yieldstreet.
Individual investors (usually of higher net worth) can be invested in a host of private equity companies at one time. One challenge to these types of investments is that, because they are not bought, sold, and tracked, through an investor’s primary brokerage firm (the way publicly-traded stocks are usually managed), individual investors may find these investments to be more complex and time-consuming to manage.
If you are managing your own investments, these well-oiled approaches may be helpful:
The Value approach is the approach Warren Buffet uses. Explains investing advice company, The Motley Fool, “Value investing prioritizes paying low prices for investments relative to their intrinsic values.” Value companies are sometimes the older “stand by” companies, solid and reliable, yet not at the top of their game in terms of share price.
The Growth approach focuses on purchasing stocks, usually of small or mid-sized companies, that can offer a big return. These are often “shiny new objects,” that are popular with investors, sell at a premium price, and are riskier than value companies.
An investor who sees major trends taking place around the world may invest “thematically” based on those trends. For example, an investor watching a decline in traditional energy company values might consider solar stocks. An investor may also invest thematically based on social values—for example, investing in companies that are environmentally focused.
Investors may choose to invest in one geographical region over another for many reasons including the investor’s own location, desire for diversification, profit potential in developing areas, etc. Although the U.S. has been a top “geographical” pick for investors, that could change. This Morgan Stanley article, 2022 Global Equity Outlook Favors Quality Stocks, Non-U.S. Markets, notes, “We expect international equities may outperform in the coming years, driven by more supportive fiscal and monetary policies in Europe and Japan, real yields rising more in the U.S. than in international markets, pressuring U.S. equity valuations in general, and U.S. growth stocks in particular.”
Investors who choose to use mutual funds, ETFs, or index funds (described above) are using the “pooled investments” approach.
A “derivative” is a contract based on an underlying asset. It is a more complex investment and investment strategy that investors use to mitigate risk. Some common derivatives are “futures,” “forwards,” “options,” and “swaps.”
Investing in equities can be fun, fascinating, and rewarding. It can also be time-consuming and risky. As your equity investing starts to progress, you will discover the type of investment vehicles and approach that works best for you.
Vyzer accommodates every type of investing, including equities. Simply sync your brokerage accounts or upload your statements through our platform’s “Magic Box,” and Vyzer will automatically update, track, monitor, and analyze all of your stock purchases, dividends, sales and much more.
Getting Vyzer on board early will allow you more time to research your investments, and to ultimately enjoy your life.