Thursday, December 23, 2010

Equities

Equities refers to equity investments, or shares in a company. An investor who holds shares in a company has an ownership interest in that company, and is therefore entitled to vote, receive dividends and other distributions, and share in the residual value of the equity in the company (assets less any liabilities). So in basic terms holding an ownership stake in a company means you are entitled to share in the company's prospects. In most cases because most companies are incorporated as "limited liability" entities the shareholders are liable to lose only the initial amount of capital that they put up. So the pay-off profile of equity is that you are exposed to losing your investment, but you also have unlimited upside exposure. Of course if you are using leverage you could lose more than your initial investment e.g. if the value of the shares you own falls below the amount of debt you used to purchase them with. Shares or stocks are often bought by investors via a public market known as a stock exchange e.g. the NYSE or NASDAQ, and many others around the world. Historically equities have tended to be more volatile than alternatives such as cash and fixed interest investments, but have also - on average - generated higher returns over the long term.

Synonyms: Shares, Stocks, Common stock, Ordinary shares

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