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What is Equity?
Equity refers to the stock of a company and is measured in number of shares. When you buy a company’s stock, you become a shareholder, a part-owner of that company. The terms ‘equities’, ‘stocks’, ‘shares’ and ‘securities’ are often used interchangeably. Equities are issued by companies to raise capital or financing from investors. These companies list their stock on the exchange in order to raise funds for reasons such as to grow its business, acquire new assets or to remain solvent.
Main Classes of Equity
Ordinary Share or Common Share: Typically carries voting rights in the meetings of the company and are entitled to receive dividends as declared by the Board of Directors.
Preferred Share or Stock: Typically carries the first preference for payment of dividends. Whenever the company distributes dividends, they are first paid on preferred share capital. In the case of winding up of the company, the preferred shareholders have seniority in regard to repayment of capital.
There are other listed investments that behave similarly to equities, such as Exchange Traded Funds (ETFs), American Depository Receipts (ADRs), Real Estate Investment Trusts (REITs) and Business Trusts. They are publicly traded and listed on various stock exchanges.
How does Equity Work?
When you invest in shares, you may seek a long or short term view in the company. If the company grows and increases in value, its share price will rise and you may sell your shares for a profit. However, if the company falls in value, its share. You may also be affected by corporate actions and rights issues (if any).
Benefits of Equity Investment
Low Capital Requirement:
The barriers of entry to equities investment are low, depending on exchange rules, the minimum denomination of shares can be as low as one share.
Dividends:
Shareholders can be entitled to payment of dividends (or distribution, in case of a REIT or Business Trust)
as declared by the Board of Directors of the company. Dividends can be both a source of income and investment returns for investors.
Diversification:
Purchasing shares of companies in different sector will help in the diversification of your portfolio. You can
also obtain exposure to a sector by investing in shares of that particular industry e.g. REITs or Telecommunications.
Capital Appreciation:
Shareholders can potentially benefit from the price appreciation of their shares.
Capital Appreciation is another source of investment returns in equities.
Key Risks of Equity Investment
Market Risk:
Risk associated with the price of the security. A share price will rise or fall with changing market conditions.
Liquidity Risk:
Risk associated with the trading volume and supply and demand of a particular share. A large cap stock is typically very liquid with high trading volumes. A small cap stock may not be highly liquid which may consequently
lead to a sizeable bid and offer spread.
Currency Risk:
If a stock is listed in a foreign stock exchange and is denominated in a different currency than the investor’s home currency, the investor is subject to foreign currency risk as the exchange rate of the investor’s home currency
and the currency of the underlying share may
move independently of the price performance
of the underlying share in its listed currency.
Macroeconomic Risk:
The economic performance of the country in which the stock is listed may directly or indirectly affect the performance of the equities market of said country and consequently the price performance of said individual security.
FAQ
Q : What stocks or shares should I buy?
A : Stocks that matches your expected returns, investment horizon, risk appetite and market view.
Q : When should I buy stocks?
A : You can buy stocks anytime if they meet your investment objective and risk appetite and independent view of the underlying equity.
Q : Why do equities prices move?
A : There are many factors affecting price actions of a stock.
For example, positive news about the company or financial results that are above market expectations can positively affect the price sentiment of a particular stock and vice versa. The reasons why a share price moves could be due to company-specific, financial, macroeconomic, geopolitical and industry news or events and/or a combination of these factors.
Q : What should I do if I'm interested in shares?
A : Please contact your dedicated Relationship Manager to find out more about our Equity Trading Services.
Before engaging in an Equity Investment with or through us,
you should be aware of the risks, which may be involved in such
trading, as well as some of our policies in respect of such trading. You should not enter into a transaction unless you fully understand:
• The nature and fundamentals of such transaction and the
market underlying such a transaction;
• The contractual relationship into which you are entering;
• The legal terms and conditions of the documentation for
such a transaction;
• The nature and extent of the economic risk to which you are
exposed as a result of such a transaction (and determine that
such risk is suitable for you in light of your specific
experience in relation to the specific transaction and your
financial objectives, circumstances and resources);
• The company, prices, dividends, currencies, exchanges,
settlement, settlement date, form and denomination, title
and transfer, fixing date and other terms material to the
transaction;
• Any terms describing the risk factors, such as market risk
(with regards to price volatility), liquidity risk, currency risk, macroeconomic risk, regulatory risk, and so on, including any condition(s) attached with the securities, concerning voting
rights or any other rights and obligations for holders of
the securities.
Warning: You may wish to seek advice from a licensed or an
exempt financial adviser before making a commitment to
purchase this product. In the event that you choose not to seek
advice from a licensed or an exempt financial adviser, you
should carefully consider whether this product is suitable for you.
