What Are Equities? Definition, Types, and How They Work

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Equities represent ownership in a company and are one of the most popular tools for building long-term wealth. When you invest in equities — often through stocks — you’re buying a share of a company’s future earnings and potential growth. That ownership stake can rise in value over time and may also generate income through dividends. For many investors, equities offer a powerful combination of risk and reward, especially when held for the long term.

But not all equities are the same. From common and preferred stocks to private equity, there are different types of equity investments with varying levels of risk, access, and return potential. This guide breaks down what equities are, how they work, the types you can invest in, and the benefits and risks to consider before adding them to your portfolio.

What Are Equities?

In investing, equity means ownership in a company. If you buy a share of stock, you own a small piece of that business.

Companies sell these shares on the stock market to raise money. That cash helps fund things like hiring, product development, debt payments, or expansion.

In return, shareholders become part-owners. If you own common stock, you may also get voting rights on key company decisions, such as electing board members or approving mergers.

Equities vs. Stocks

The terms “equities” and “stocks” are often used to mean the same thing, but there’s a slight difference. Stocks usually refer to publicly traded shares you can buy and sell on the stock market. Equity, on the other hand, is a broader term that means ownership in a company–including both public and private investments. Stocks are the most common type of equity, but they’re not the only kind.

Types of Equity Investments

Equity investments come in several forms, each with different risks, benefits, and levels of access. Here’s a quick look at the most common types you’ll encounter as an investor.

Common Stocks

Common stock represents a share of ownership in a company. It gives you voting rights and the chance to receive dividends, and it’s the type of stock most people buy and sell on public exchanges.

Because it trades on the open market, its price can rise or fall based on investor sentiment–even if the company’s actual ownership structure doesn’t change. This can make it volatile, but also full of opportunity.

If you’re buying 100 shares of a company like Apple (AAPL), you’re buying common stock — the most common way investors participate in the stock market.

Preferred Stocks

Preferred stock is another type of equity that also trades on public exchanges, but it’s less common and usually less volatile than common stock. It behaves more like a bond, offering fixed dividends that are often higher than those paid to common shareholders. Some preferred stocks last indefinitely, while others have a set term, such as 20 years.

Preferred stockholders have a higher claim on company assets and earnings. If a company goes bankrupt, it’s paid out before common shareholders but after bondholders. They also receive dividend payments before any are made to common stockholders.

Private Equity

Private companies also issue stock, but it’s not traded on public exchanges. Whether a company is public or private, owning shares means you have equity in the business.

Private equity is usually limited to wealthy, accredited investors and is hard to sell once you own it. Public equity, by contrast, is open to anyone and can be easily bought or sold on the stock market.

Benefits of Investing in Equities

Private companies also issue stock, but it’s not traded on public exchanges. Whether a company is public or private, owning shares means you have equity in the business.

Private equity is usually limited to wealthy, accredited investors and is hard to sell once you own it. Public equity, by contrast, is open to anyone and can be easily bought or sold on the stock market.

How To Invest in Equities

There are several ways to start investing in equities, depending on your goals, comfort level, and how hands-on you want to be. Here are the most common ways to invest in stocks:

Direct Stock Purchase

You can buy individual stocks through a brokerage account, and it’s now easier and cheaper than ever. Most online and traditional brokers offer commission-free trading and even allow you to buy fractional shares.

This means you don’t need hundreds of dollars to get started. For example, instead of paying $900 for one share of Costco, you could invest $100 and own a fraction of a share.

Mutual Funds and ETFs

Mutual funds and ETFs let you invest in a mix of stocks or other assets with just one purchase. Mutual funds are usually actively managed by professionals, while ETFs often track an index like the S&P 500 and are passively managed.

Both offer instant diversification and are great options for investors who prefer a hands-off approach or want to avoid the risk and research involved in picking individual stocks.

Retirement Accounts

Many people first invest in equities through a 401(k) at work, which typically offers mutual funds that provide stock market exposure with tax-deferred growth. You don’t pay taxes on gains or dividends until you withdraw the money in retirement.

IRAs work the same way but offer more flexibility. With an IRA, you can choose your own investments, like individual stocks, mutual funds, or ETFs, instead of being limited to your employer’s options.

Equity Investment Strategies

• Growth investing involves buying stocks in companies with strong potential for revenue or earnings growth. While these stocks can be volatile, they offer the highest potential for long-term returns.
• Value investing focuses on stocks that appear undervalued by the market. These companies often have lower price-to-earnings ratios and higher dividends, offering a more conservative investment with potential for upside when market sentiment shifts.
• Dividend investing centers on companies with consistent, often growing dividend payouts. These stocks typically come from mature, stable businesses and are valued for steady income over rapid growth.

Should You Invest in Equities?

Investing in equities–also known as stocks–can be a powerful way to grow your wealth over time. Historically, equities have offered higher long-term returns than most other asset classes, including bonds and cash. But with the potential for higher returns comes greater risk and volatility.

Here’s when equities may make sense:

• You have a long time horizon. If you’re decades away from retirement or won’t need the money soon, you have time to ride out market ups and downs.
• You’re comfortable with risk. Stock values can swing dramatically. If you can stay invested through market downturns, equities can reward patience.
• You want growth. Equities offer the best opportunity to outpace inflation and build wealth, especially when reinvesting dividends and staying diversified.

However, equities might not be the best choice if:

• You’re nearing retirement or need the funds within the next few years.
• You’re highly risk-averse and market drops keep you up at night.
• You haven’t built an emergency fund or paid off high-interest debt.

Bottom line: Equities can be a smart part of your investment strategy, especially for long-term goals. The key is to find the right balance based on your time frame, risk tolerance, and financial priorities.

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