Equity ownership is the shares held by a person or an organisation of a publicly listed company. A person can buy stocks to become a partial owner of the company. If the price of the stocks increase, the investor can sell them and make profits. On the other hand, if the price of the stock goes down, and the investor decides to sell, he or she will have to incur losses instead. Companies also provide annual dividends to its equity holders, by distributing the profits of the company in proportion to the share holdings of the investors.
Equities as Instruments of Ownership
Ownership through shareholding is a privilege equity holders get, such as the rights to vote on the decisions regarding the growth of the company, or the entitlement to receive dividends on an annual basis. Dividends are profit shares the company divides among its shareholders, in proportion to the number of shares one holds. But, it’s not compulsory that a company allocates dividends to its shareholders.
Types of Equity
Common Stock vs. Preferred Stock
Common stocks or common shares are stocks issued by the company which anyone can buy and assert a partial ownership in the company. The companies normally list their shares in a stock exchange. For example, most public companies in the United States of America list themselves on the New York Stock Exchange or Nasdaq. By buying stocks of a company, the buyer becomes a shareholder. This partial ownership gives the buyer voting rights to influence the decisions regarding the future growth of the company. The main advantage of owning common stocks is the potential to earn big profits over time through capital appreciation.
Preferred stocks or preferred shares exhibit similar attributes to common shares or common stock. But, preferred stocks provide no voting rights to the shareholders. Instead, preferred stocks give the owners the right to receive annual dividends from the company, based on the profits made by the company and the number of shares held by the shareholder. Also, the shareholder will be compensated in case the company fails in announcing its annual dividends. Preferred stocks have less capital appreciation potential compared to common stocks, but they can be converted to common shares as well.
Role of Equity in Investment
Stock market is one of the major financial markets across the globe. Companies get listed through stock exchanges, which in turn enable the public to buy shares of that company. When it comes to investments in general, equity investments are a major tool to build wealth and grow your profile.
