Equities are a form of ownership that gives the purchaser or investor the right to receive dividends from a company. The most common way to purchase equities is through stocks or shares of a company.
Equity Investment 101
Before you invest in stocks, it can be helpful to understand the different stocks you can invest in on the stock market. Stocks can be divided into four categories: large-capitalization stocks, small-cap stocks, aggressive growth stocks, and value stocks.
Large Cap Stocks
Companies with more than $10 billion market capitalization issue large capitalization stocks. These are ideal for those who have a lower-risk investing style. This is because large-cap stocks tend to be more mature, less volatile, and therefore more stable investments.
Companies with a market capitalization under $2 billion issue small-cap stocks. Small-cap stocks have greater growth potential than more mature stocks. The money invested therefore has the potential to turn into massive capital gains – although, with greater reward comes greater risk.
Growth stocks are aggressive stocks that have high-risk, high-reward potential. They are associated with a higher growth rate than the market’s mean growth rate. Investors choose growth stocks to earn profits from rapid price appreciation.
Value stocks refer to company shares that trade at a lower price relative to their fundamentals, such as dividends, earnings, or sales. Value stocks remain steady through varying market conditions and slowly increase in price, making them low-volatility investments. However, the value of value stocks is really only accessible if you invest while they’re down or before the price reflects their actual value.
Both large and small-cap stocks pay investors through dividends. Most investors will make their money this way. However, there are other ways to make money investing in equities.
How to Buy Equities
You don’t need to work with a financial advisor or brokerage firm to buy or sell an equity fund, but you do need an investment account to hold them.
If you’re buying and selling securities regularly, there are two types of accounts that can be used: brokerage or trading accounts. If you’re in India or purchasing on the Indian market, you will also need a demat or dematerialized account.
The easiest way to break into the market for beginning investors is by opening a trading account.
Brokerage or Trading Accounts
Brokerage accounts are typically held at a bank or broker by an investor or trader who buys and sells securities through them. A brokerage account can also be held at a custodian, which is typically an online service or platform that offers convenient ways for you to access your investments from one place.
A brokerage account will hold all of your securities on your behalf. There are multiple brokerage accounts: some offer online trading platforms (an online broker) where you can buy and sell stocks without paying commissions; others require investors to meet with a human broker in person or over the phone.
Do You Need a Brokerage Account to Invest in the Stock Market?
Stockbrokers can still be a valuable resource to help you manage your investments, but if you don’t need their services, there are other ways you can buy stocks without paying commissions.
Online brokers generally charge no fee for selling and buying stocks. Fee schedules may apply for options contracts and futures. Investors who want to trade independently can buy stocks without paying commissions at most online brokers these days.
Public vs Private Equity
Public equity is a form of investment traded publicly, so it’s accessible to any buyer with a brokerage account. Private equity is a bit different -- it involves investing in companies that are not publicly traded. They usually source their money from hedge funds, venture capitalists, or high-net-worth individuals called angel investors.
Public equity generally carries less risk than private, which is why the government has no restrictions on who can invest. This is different from private equity, which usually has a minimum net-worth requirement for those who want to invest. This is because the government assumes that private investments require a higher risk tolerance than public investments due to the size of the investment.
Indices and Single-Name Equity Investments
An equity index is a statistical measure of changes in the market value of a specified group of stocks or shares over time. Single-name investments involve investing in a single company.
There are many different types of equity indices. Some are based on specific sectors or industries called equity sectors, while others are based on regions. The most well-known equity indices are the Dow Jones Industrial Average, The S&P 500, the FTSE 100 and the Hang Seng index.
If you’re starting with investing, it’s good to know that there are many different ways to get into public equity. Investing in equity indexes exposes retail investors to some of the largest and most influential companies in a given sector or region—like the Dow Jones, a stock market index of 30 prominent companies listed on stock exchanges in the United States.
Indexing provides greater diversification (a strategy to reduce risk) while incurring fewer expenses and fees than actively managed strategies. Indexing is a long-term perspective on investment and attempts to match the risk and return of the overall market.
Equity index investing is one of the most popular ways to invest in the stock market, and it’s easy to understand why. You can buy into a fund that tracks an index like the S&P 500 or the NASDAQ, and you don’t have to worry about picking individual stocks! You also get the benefit of instantly diversifying, lowering the overall risk of your stock portfolio.
Single-name equities are the stocks of individual companies. You can buy a single share of Amazon or Apple stock, or you can buy shares in an index fund that tracks the performance of all stocks in a given sector or industry.
Mutual funds, ETFs, and Single-Name Equities
Mutual funds are pools of investor money that a professional fund manager manages. They allow investors to make investments without doing all the research on individual stocks themselves. They also provide diversification across multiple asset classes and industries for risk mitigation purposes.
Exchange-traded funds (ETFs) are mutual funds that trade like an individual stock through a stock exchange rather than being bought directly from an investment firm. An exchange-traded fund exposes investors to multiple asset classes and investment strategies through one security—essentially combining the benefits of mutual funds and single-name equities into one product.
How ETFs, Mutual Funds, and Single-Name Equities are Traded
ETFs and single-name equities can be bought and traded through online brokerage accounts. Mutual funds are purchased directly from the fund company or through an authorized broker.
Investing in stocks can be very rewarding, but you have to be wary of the risks equities come with. The right investment strategy can help you grow your money and keep it safe. If you're looking to diversify your equity investments and make them a part of a balanced portfolio, using a platform like Hedgeful will make your investment journey simpler and better.