These are investments in equities of various stock exchanges and markets. Fundamentally, equity is a claim on the earnings and assets of a business/company that is subordinate to that of debt. Equities are traded actively on stock exchanges, and generally have higher volatility than fixed-income instruments in part due to the variance in earnings being magnified by the use of leverage in companies with debt. With higher volatility, equities have also historically produced higher returns than fixed-income instruments.
Some of the world’s major exchanges include NYSE, NASDAQ, HKEX, SGX, ASX, and EURO STOXX. An example of a global index is the S&P Global 1200. The index comprises securities in 29 countries.
Why Invest in Equities?
- Stocks offer the most potential for wealth accumulation
U.S stocks have outperformed bonds over the long-term. Intuitively this can be attributed to the natural desire for progression in the economy. As industries grow, populations become wealthier, live better and spend more, fuelling subsequent growth phases in the economy in a cyclical way. Equity represents a share in the (growing) earnings of these companies. The potential return for equities is thus higher than that for bonds, which promise a fixed payment whether or not the economy grows.
- Stocks are accessible
Information on public companies is widely accessible; their audited financial reports and data are publicly available. Investors can generally invest in stocks directly and conveniently through a (electronic) broker. Financial analysis and news on stocks, as opposed to (corporate) bonds, for example, are also far more rampant. This helps one keep in the pulse on their investments.
- Stocks provide great variety
Even amongst stocks as an asset class, investors can achieve diversification because of the voluminous amount of stocks available, along with different types of riskiness for each stock. Stocks with stable earnings and operating environments with a consistent and time-tested dividend histories can provide a ‘fixed-income’-like opportunity. At the same time the investor may have in his portfolio a young technology company with little history of profitability, but the potential to have explosive earnings and price appreciation. The permutations are endless.
Types of Equities
There are two main types of equities/stocks: common and preferred. Common stock generally entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings, and can have a higher dividend yield. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.