What are equity securities?
Hi all. If you haven't invested anywhere yet, now is the time to do so. But what to invest in to make a profit higher than on bank deposits and government bonds? Of course, in equity securities.
In this article, I will tell you important information about these exchange-traded assets, I will make a comparison of debt and equity securities. Enjoy reading.
- What is it and why are they needed
- Comparison table
- How equity securities are traded on the market
- What is the difference between equity and debt securities
- Is it profitable for the issuer to issue equity securities
- What is more profitable for the investor
What is it and why are they needed
Equity securities include assets, by purchasing which, the investor becomes one of the co-owners of the company, receives a share in the business. If the business is successful, then the market price of the securities grows for long periods. The main difference between equity and debt securities is that the investor is not a creditor for the company, does not lend it money at interest.
Equity securities are perhaps the most liquid assets of all circulating on the stock market.
There are 3 types of equity securities:
- share certificates
- investment shares.
The former are the leader in popularity among market participants.
A share is a share security, which gives its owner the following rights:
- Participate in the management of the company (in the meeting of shareholders).
- Receive a portion of the company's profits in the form of dividends. All profits are evenly distributed among the shareholders. Dividends on securities of Russian companies are usually paid once a year, for Western companies — once a quarter.
- When the company is liquidated, all its property is sold, debts are paid. The remaining funds are distributed among the shareholders.
Issued by AO and PAO (formerly ZAO and OAO). The Central Bank of JSC can be acquired only by the founders of the company and a trusted circle of persons. PJSC assets are traded on the stock market, anyone can buy them.
The shareholders' meeting elects the board of directors that manages the company. The power of a shareholder's vote is directly proportional to the size of his share. The presence of more than 50% equity assets (controlling stake) gives almost unlimited power in terms of management.
If no one has a controlling stake, then shareholders with 20-25% of the Central Bank can veto any decision. Small investors holding more than 1% of securities may require reports on meetings, reports on decisions taken.
There are 2 types of investment funds:
- mutual fund
A mutual fund (mutual investment fund) is a fund consisting of funds from a large number of investors, each of whom owns a certain share in this fund. Mutual funds are created and managed by a management company (MC), they are a collective version of trust management. PIF is not a legal entity.
An investment share is a security that confirms the investor's share in the property of the fund and gives the right to withdraw funds from the mutual fund in accordance with the share. Units of mutual funds can be traded on the stock exchange. There are such assets on the Moscow Exchange, their liquidity is close to zero. Mutual funds in the Russian Federation are very unpopular due to the high commission for investors.
Much more popular are ETFs, about which a separate article has been written, I recommend reading it.
There are 2 types of shares:
Let's compare them.
|The owners may participate in the shareholders' meeting.||Owners cannot participate in the shareholder meeting|
|The amount of dividends depends on the profit of the company and its development strategy. Dividends may not be paid, such shares are called ordinary shares with deferred payment.||The amount of dividends is fixed. Dividends must be paid annually. Preferred dividends are often lower than ordinary dividends, but they are guaranteed.|
|The risks when buying ordinary are usually high.||When buying preferred risks are reduced. Such assets are considered intermediate between bonds and ordinary shares.|
|More liquid equity assets||Less liquid equity assets.|
|There are 3 echelons of shares depending on liquidity:
1 echelon, or blue chips. It includes shares of the largest companies by capitalization. They have very high liquidity. Investment risks are minimal.
2 echelon. Average liquidity, average level of risk.3 echelon. Low or no liquidity at all. Buying them is not always realistic due to inadequate spread. All new enterprises belong to the 3rd echelon. The risks are maximum.
How equity securities are traded on the market
Initially, the Central Bank has a nominal value, at which they are primarily sold on the market. IPO (initial public offering) is the process of initial placement of the issuer's securities on the stock exchange. After the IPO, all shares will already be considered purchased on the secondary market. Sometimes the issuer may carry out their additional issue.
The price of shares is set by the market itself, that is, it depends on supply and demand. If a company performs well, pays regular dividends, and consistently delivers good news, its stock price will rise. However, even good indicators do not guarantee an increase in asset prices. This is clearly seen in the Russian example: the activity seems to be successful, but Western sanctions are pushing the price down.
By the way, for stocks there is a concept of objective value. The objective value is estimated only on the basis of an analysis of the activities of the issuing organization. For example, the securities of many American companies are considered highly overvalued with a real value several times lower.
The Russian stock market, on the contrary, is considered to be highly undervalued. However, all these are just theoretical indicators: the market value does not have to be equal to the objective one, but over a long period it will still tend to it.
Units of mutual funds and certificates can also be bought on the stock exchange. Their price is directly dependent on the invested asset.
What is the difference between equity and debt securities
|Comparison criterion||Debt securities||Equity securities|
|Traded on the stock exchange?||Yes||Yes|
|Yield||Low (7-12%)||Potentially high (up to 50%)|
|Level of risk||Short||High|
|Reasons for possible drawdowns||Company bankruptcy||Bankruptcy, financial crises, bursting bubbles|
|Type of investment||Short||For investors, mostly long-term|
|How does an investor earn||Accumulated coupon income + a couple of percent growth in the market price||Dividends + growth of the market rate|
|Is day trading possible?||unlikely||Yes|
|Is income guaranteed?||Yes||Not|
|Who is the issuer||State, municipal structures, corporations||Only AO and PAO|
|Term of the security||Fixed||Perpetual|
|The basic principle||The investor acts as the issuer's creditor||Investor — partner and co-owner of the issuer|
Debt securities are always considered less risky, since in bankruptcy, debts are paid first, only then shares to shareholders. The main thing to know is that debt securities are low-risk, low-yield securities, while equity securities are high-risk, high-yield ones.
About trust certificates
A trust certificate is a non-issue securities issued upon transfer of an investor's assets to trust management and confirming the right to own these assets. Trust certificates are among the rarely used variants of debt securities.
Is it profitable for the issuer to issue equity securities
Certainly beneficial. This can be seen, if only because all major world companies issue their shares. In addition to large ones, there are small ones, they have their own equity securities. Even a small shop in your yard probably has several owners-shareholders, it's just that their equity securities are not traded on the exchange.
Issuing equity securities is the easiest and most affordable way to raise capital.
What is more profitable for the investor
The answer to the question directly depends on the goals of the investor himself: what income he wants to receive and what risks he is ready to expose himself to. The main thing is not to forget about the diversification of equity assets and not to invest all the money in one thing.
We have already found out that it is absolutely unprofitable to buy shares in the Russian Federation, there is a much more profitable analogue called ETF. But it’s worth investing in stocks, or buying a stock certificate from someone. Buying a certificate provides an excellent opportunity to diversify your assets.
Equity or debt securities
The most reasonable solution would be to buy both. You just need to determine the proportions. If you want higher returns and are willing to take risks, increase the proportion of shares in your portfolio; if you need reliability, buy more debt securities. Again, full diversification means that both types of equity securities make up only a fraction of your total investment portfolio.
In addition to the Central Bank, it is worth investing in other assets, such as gold or real estate.
Every investor should pay attention to equity securities. This tool is very simple and profitable. If you don’t know what to invest in, invest in equity securities, it’s simple. Any highly liquid stocks will bring you profit in the long run, but remember to diversify your risks.
Good profit to everyone, do not forget to like, subscribe on social networks to keep track of new interesting articles.