CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
We often come across news of mergers and acquisitions, where one company acquires a significant equity stake in another. Equity stake represent the percentage of the business owned by an individual or a company, through the purchase of shares of that business. Shareholders owning a significant equity stake often have a say in the organization’s policy making and some level of control in the financial decisions too.
This concept is often used by start-ups to incentivise their employees, giving out equity stakes in their companies to employees rather than higher salaries. Creditors can also acquire equity stakes in organizations, in lieu of debt. In trading, equities are one of the principal asset classes in the global financial markets. Before we move on to equities trading, let us understand the concept in detail.
In most cases, these three terms usually are synonymous with each other, but there are some specific differences.
Each unit of a stock issued by a company is called a share. This represents one unit of ownership in the organisation. Shares can also represent other forms of investments, such as mutual funds. Shareholders are always stakeholders in a publicly traded company, but stakeholders need not always be shareholders. Stakeholders do not necessarily own the company’s stock. Two types of shares exist – common stock and preferred stock.
Broadly, there are two types of investments that a company can opt for in order to raise capital –debt financing and equity financing. In the latter case, companies issue stock, which are basically securities representing ownership in the firm. Stockholders have a claim on the company’s assets and earnings when they purchase such stock. They are also rewarded with quarterly or annual dividends in return. Traders speculate on stock prices, wherein if a company’s stock price goes up, the trader can make a profit by selling at the increased price.
As we said earlier, stockholders or shareholders are always stakeholders, and that stake represents the percentage of the company that they own. You may be a bond holder, which means you will have much to gain if the company performs well. A bond holder is also a stakeholder.
These terms often overlap and are used interchangeably. In short, all shareholders are equity holders, but not all equity holders are shareholders. Not all businesses issue shares of their stock, but it is possible to have ownership interest in them.
This can be explained with the help of a simple accounting equation:
Assets – Liabilities = Equity
So, if a company uses up all its assets to meet its debt liabilities and other payment obligations, the amount that is left over is a shareholder’s equity. Assets here can include land, buildings, machinery, capital goods and inventory, and earnings. One can calculate the equity of an organisation after assessing the value of these assets at market price.
The stockholder’s equity comes from two sources:
These are places where shares are issued by companies and traded on exchanges or Over-The-Counter (OTC). A vital part of the global economy, these markets strengthen companies by allowing them access to investors, in order to raise money for business activities. In return, the investors gain a portion of ownership in the organisation and are able to benefit from dividends, based on the company’s yearly performance.
Most equity trading takes place on stock exchanges around the world, such as the NYSE and NASDAQ, where the former is a physical stock exchange, while the latter is a virtual trading market.
Traders try to ascertain the fundamentals of the share value before investing in a company’s stock. This depends on the trading style and investment goals to a great extent. Investors who are interested in capital preservation tend to look for low-growth companies in the utilities sector. Those who do not have much appetite for risk-taking tend to invest in stable blue-chip companies. Investors looking for appreciation of their capital reserves usually look at stocks with ranging market caps.
There are quite a few factors to consider while choosing a stock to invest in:
