Equity investing is a complex, though necessary, concept to be aware of when it comes to finance.
Generally, equities refer to the investment a company returns to its shareholders when it pays off its debts through liquidation. Liquidation means converting assets to cash by selling them. Equities are one of the most significant pieces of data used to determine the overall health of any particular company.
To learn more about equities, their various forms, and how they work, read on.
What is equity?
Equity is recorded and analyzed for accounting purposes, but defining it depends on the context. Equity can refer to stock shares, owning a piece of a company, or the value of a business, to name a few.
Investors actively seek out equity to have a stake in a company and earn profits as the company grows. Collecting capital gains from those earned assets is also a bonus and promotes even more individuals to invest, continuing a company’s progression. It's a cyclical pattern.
However, investments do not involve borrowing. So equity investing does not influence your credit score since credit bureaus do not collect this information. By extension, there is no need for recurring payments. You either make a profit, or you don't.
Forms of equity
Again, equity represents different things depending on the situation. However, there are four main ways to talk about equity when it comes to investing.
Equities
The term "equities" is shorthand for shares and securities in a business. It is easy to recognize this type of format, as it is always in the plural form "equities" instead of "equity."
Shareholder equity
Shareholder equity is perhaps the most well-known and the most common type of equity. Shareholder equity is always in singular form – "equity" – and refers to the portion of a company that its shareholders own. This value is an essential factor in calculating the net worth of a company. The formula to determine this is below.
Total assets - Total liabilities = Shareholder's equity
A company's balance sheet records this information and uses it in accounting procedures and analytics. Assets and liabilities are listed separately. As a result, equity, in this context, can either be a positive or a negative value.
Private equity
Private equity applies to parties that don't participate in public trading. Instead, individual investors funnel private funds directly to businesses or initiate a complete buyout.
Businesses usually turn to private equity investments as start-ups since they don't have enough profits to acquire major loans from the bank. Only "accredited" investors – individuals with a net worth of $1 million or more – can participate. Other examples of where private equity comes into play include in the context of insurance companies and private universities.
Private equity is a long-term game and requires patience to reap the benefits, specifically high returns. Put simply, increased costs and high stakes characterize private equity. This type of equity is unique because it provides investors with information that's not exclusively available, such as greater insight into a company's equity portfolios and how it manages equity.
Unlike venture capitalists, who only partially invest in a company, private equity investments concern 100 percent of the enterprise.
Home equity
Home equity refers to the current market value of your home. This value is dynamic insomuch that it rises and falls according to real estate trends.
To calculate your home equity, subtract the price of your home from its mortgage value. While not necessarily as well known as other types of equity, it is a common form of collateral that individuals often use to acquire a second mortgage loan.
Furthermore, there is something called a home equity line of credit or a HELOC, which allows homeowners to bargain for a loan. This means your home itself acts as collateral to the bank. Afterward, you build equity through your recurring mortgage payments.
If you cannot pay back the loan, you may lose your property to the bank.
How is equity used for investors?
There are two options when deciding to invest in a company: equity funds and individual stocks.
Equity funds
Equity funds occur when you purchase shares that another party manages on your behalf. Stock managers also have the authority to buy, sell, and pass on stocks. In turn, you forfeit some control in the process, but you also don't have to worry about staying abreast of every economic trend.
Ultimately, equity stocks are a good strategy if you want to participate in the market but leave the details and grunt work to the professionals.
Individual stocks
In comparison, individual stocks are a more hands-on approach since you'll be managing equity portfolios yourself. You have more control over the process but more responsibility as well.
Typically, those who have a more sophisticated understanding of the market opt for individual stocks.
At the end of the day, whichever option you choose, remember always to make sure you do your research before investing.
If financial control is a priority for you or you're looking for more transparency when handling your money, an alternative tool to keep in mind is Point Card.
You work hard for your money, whether that means investing it in equities through traditional salaried employment or acquiring assets with capital gains. Either way, Point works hard for you in return. Point is designed for those who want to use their money as they see fit while receiving exclusive benefits, including unlimited cash-back on all purchases, including bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shops. Plus, Point Card comes with car rental and phone insurance, not to mention travel benefits and fraud protection.
Point Card is an excellent tool for intelligently navigating your financial journey.
Why should you consider equities?
Owning equity is another way to supplement your income because the potential for higher returns is always there, especially if a company is steadily growing. Additionally, if the value of an equity investment rises, you will receive the monetary difference as an investor.
Equities, or stocks, are a long-term process that takes time. That said, equities allow you to participate in the market, collaborate with various businesses, and profit alongside them without needing to have notable expertise in finance and the economy.
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