Equities (Stocks and Shares)

What are Equities (Stocks and Shares)?

Stocks, shares and equities are terms used to describe units of ownership in one or more companies. The owner, known as a shareholder, will also have the right to a part of the company’s earnings if a dividend payment is made, as well as voting rights.

The terms are often used interchangeably in finance, but there are some technical differences between them that can cause confusion. Equity is the term for a total ownership stake in the company after the repayment of any debt, while a share or stock describes a single unit of ownership. The plural term shares usually refers to units of ownership in a specific company, while equities and stocks are terms generally used to refer to portions of ownership across multiple companies.

Unlike Fixed Income, Equities don’t pay a fixed interest rate and they don’t offer guaranteed income. In other words, investing or trading in equities inherently come with risk.

There are a few ways in which you can invest in equities. Most equity trading refers to the buying and selling of public company shares through a stock exchange or as over-the-counter (OTC) products via a Broker or directly through online trading platforms.

For example, UK companies can list on the London Stock Exchange (LSE). Exchanges have requirements that companies must meet in order to become listed. To be listed on the LSE, a company needs to have been trading for at least three years. It would also need a market capitalisation of at least £700,000. Market capitalisation is the number of outstanding shares in circulation, multiplied by the current share price.

The size of the company also affects the type of equities you can invest in:

• Large-cap​: also known as ‘blue chip’ stocks, these are stocks from large companies. They can offer regular dividend payments and steady growth in share prices.
• Mid-cap: these are equities from medium-size companies. They are slightly riskier than large-cap, but still pay a dividend and can have greater potential for growth.
• Small-cap: small company stocks are much riskier. They don’t usually pay dividends, but if the company is successful, the share price can rise dramatically.

The price of shares is affected by several factors that can be both internal and external, according to economic indicators. For example, companies publish their financial results once a year, and if the company is performing well and this is expected to continue, this could have a positive effect on the share price. The opposite also applies. Another influential factor on the price of equities is the general economy. If economic conditions are good, this will have a relative effect on the value of equities.

Market sentiment and demand for shares can increase the price of stocks. The more demand there is for a stock, the higher its price will be. If economic conditions are bad, on the other hand, investor demand for equities is likely to decrease. Share prices can therefore fall, even if a company is performing well.

One can gauge the general performance of equities via a stock market index. In the UK, for example, the main stock market index is the FTSE 100. This measures the performance of the 100 largest companies in the UK by market capitalisation. There are many different indices measuring the performance of equities in different countries, regions and industries.

A trader has a number of options when it comes to trading in the equity market, including investing via a shareholder or investment fund. Some banks also offer ways to invest in the equity market. There are a variety of funds available (equity traded funds) and the services they offer can be different. Some allow traders to manage the shares themselves, while others will manage the portfolio on behalf of their clients for a fee.

It is possible to buy and sell equities through an investment fund, such as an exchange traded fund (ETF). Equity funds invest in a range of shares in different companies. They diversify and spread the risk by investing in equities from different countries, regions and industries. By investing in shares this way, you are taking direct ownership of the underlying asset. This means that if the value of a stock rises, you make a profit. If the value of the stock falls, you make a loss. You also get the benefits of any dividend payouts.

As well as ETF Trading you can also trade the financial markets via spread bets and contracts for difference (CFDs). When share trading in this way, you don’t take direct ownership of the underlying instrument. Instead, you are taking a position on the price movements of that instrument. This is known as derivative trading. Spread bets and CFDs are both leveraged products, which means that you only need to deposit a percentage of the overall value of a trade to enter that trade. This deposit is known as margin. Profits and losses are based on the total value of the trade, not just the margin amount, so, it is possible to make larger profits, as well as larger losses.

An advantage of spread betting and CFD trading is that traders can make money from rising as well as falling markets. This is known as going long or short. The ability to take a short position in this way allows traders to hedge a physical share portfolio if it was losing money in the short term. This can be done by opening an opposite position in the same company’s shares as a spread bet or CFD.

Equity day trading
Day trading is a short-term strategy that involves the analysis of price movements. It requires traders to be alert and quick with their transactions. Day trading strategies aim to buy and sell equities, such as shares, and profit from small price movements when the market is particularly volatile. They then close their positions before the end of the day, in the hope that these small profits have overridden any losses. Day trading is effective within volatile markets, as there is more liquidity and traders are entering and exiting the market often.

Options trading
Options are derivative contracts that can also be used to trade stocks and shares at a future date, for a specific price. Orders for options are conducted in the same way as equities, with buy and sell offers, and transactions between both products work in a similar way. However, all options have an expiration date, whereas stocks can be held for an indefinite amount of time. In addition, options do not give traders the right to earn dividends or ownership of the asset, whereas equity trading allows for both of these.