That bovine monstrosity is on fire… we might as well hold on tight and ride it out. Don’t be afraid to gallop the bull all the way to Wall-Street. Let’s talk straight, slink a bit less – pardon the pun – bull and learn the basics of equity.
In finance and investment, the word equity pops up with alarming regularity, and it’s usually followed by its sibling shares. Equity shares are the principal source of funding for most business ventures, it’s their main fount of finance. In principle, these are shares issued to the general public with their own distinct set of features and characteristics:
- Equity shareholders, those that purchased the shares, have the right to regulate the affairs of the company.
- Equity shares are permanent in nature.
- Shareholders are the substantive owners of the corporation and they bear the greatest risk.
- Allowances and dividends paid to shareholders is in fact an appropriation of profit.
- Shareholders do not get a fixed rate of payouts. They make money when the company makes money; and they obtain a percentage of that profit based on how many shares they have.
In essence, Equity is the excess earnings a company makes that’s later distributed among its investors/shareholders. It’s the profits split amongst its venture capitalists once the bills have been paid and the company’s liabilities squared off. When you purchase a company’s stock, you’re really just buying a percentage of this equity. Acquiring those juicy shares of a stock indicates you in fact own a portion of the company; you’re risking your neck investing in its future and progress – you are in a way loaning them money. And how do they pay that loan? Two ways: through the use of Common Stocks or the employment of Preferred Stocks (more on that later).
Shares 101
- There are two types of stocks:
Common stocks – this is the sort of share most people talk about when referring to the inner workings of the stock market; the ones they are talking about when boasting of their Wall-street triumphs or lamenting their woes. The vast majority of stock out there is this type. Simply stated: you own a piece of the company and have voting rights. You bought part of the company, took a chance on them, and gave them money to expand or invest. Now, if you’re jeopardy paid off, they’ll repay you by giving you a piece of their earnings. You may obtain dividends depending on the surplus earnings. You have a say-so in how the company does its business; how it conducts itself, where it spends, what new markets it wants to exploit, employment regulations, etc. You are part of the board, and depending on how many shares you have, you can dictate how the company operates and how it’s using your investment.
The second type is the Preferred stock. This type doesn’t come with voting rights but does guarantee a fixed dividend forever. This is the less common of stock options. In a way, it’s akin to what we normally understand as a modern-day loan. You gave the company money, they gave you collateral for said capital, and now – according to contracts and figures – the company has to pay a fixed rate.
The Common stock shareholder only acquires a payout once the overhead is cleared and the Preferred stock shareholders are given their monthly pound of flesh.
If the company goes bust and files any of these nasty Chapters – like Eleven – the common stock shareholder is the last in line to receive any compensation; the greater the risk the higher the reward.
- Stocks or shares are bought and sold – “traded” – in exchanges. These are virtual or tangible locations where transactions are executed under an umbrella of legal protection.
- When a company distributes shares, it does so on the primary market by way of an initial public offering (IPO). The company is reviewed and audited by an objective underwriter who determines its value. This IPO examined stocks that are sold directly to financial institutions. When most people trade stock, they do so in the secondary market; exchanging shares that have already passed the IPO phase and are now owned by these secondary financial institutions. You are not buying directly from the company but from an intermediary.
- For companies, equity shares are the most important source of finance. Shares help companies expand and grow.
- The value of equity shares is displayed in different terms – face value, book value, issue price, market price, intrinsic value, etc.
From an Investor’s Point of View:
- Equity shares can be sold at the drop of a hat in the capital market. They are liquid in nature and serve as a great way to expand an investor’s portfolio.
- The payout rate is higher for the equity shareholders when the firm earns high profits. When they make it big you cash in.
- The shareholders have the right to control the company’s management.
- The shareholders not only get the benefit of profits but they also get the advantage of price appreciation in the value of their investment.
Equity, like everything linked to the stock market, is really a numbers game with multiple factors that need to be addressed. The slightest tremor, not only economically or politically and stock might take a dive. A typo might end up costing 200-million dollars (as it occurred to Mizuhu Securities in 2005) or a presidential Tweet might turn the balance of the stock market on its head.
Thousands of different circumstances have to be addressed in order to properly trade in the stock market. It’s a practice that involves research, analysis, the proverbial ear to the ground, and gut-instinct. That’s why it’s key to have a proper financial advisor, someone you can trust with a great securities record, and a capable staff with all the resources necessary.
At Brickell 21 we work with the best individuals available all spearhead by a President with more than 15 years of experience in the field. For sound advice, personal attention, trust, and a customized and comprehensive investment plan get in contact with us.
We pride ourselves in helping you navigate the stock market and securing your financial future.
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