Equity securities are what modern investors need to know

For those looking to build wealth and explore investment options, equities are a crucial tool that must be clearly understood. Equities are popular investments among investors willing to take risks for potentially higher rewards—that is, owning a part of a business.

This article will guide you into the world of equities, from basic definitions and different types to comparisons with bonds and stocks, so you can make informed and effective investment decisions.

What Are Equities? Definitions and Main Types

Equity is a financial document representing ownership rights in a business. When you buy equities, you become a shareholder with certain rights in the company, such as the right to receive a share of profits in the form of dividends and the right to participate in decision-making through voting at shareholder meetings.

Investing in equities involves higher risks than investing in bonds because, if the company faces financial difficulties and ceases operations, shareholders are only paid after creditors. However, this risk comes with the potential for higher returns.

Before investing in equities, investors should study the company’s stability, growth prospects, and management credibility to ensure their investment funds are used appropriately and have growth potential.

Types of Equities

Equities come in various types designed to meet different investor needs.

Common Stock represents ownership in a company. Common shareholders have the broadest rights, including the right to receive dividends from net profits, voting rights in company decisions, and the right to recover remaining assets upon liquidation.

Preferred Stock offers a hybrid between stocks and bonds. Preferred shareholders receive fixed dividends and are paid before common shareholders if the company liquidates. However, preferred stocks usually do not have voting rights.

Warrants are instruments that give holders the right to buy or sell shares at a specified price and date. Returns from warrants depend on the increase in the underlying stock’s price and can also be sold to other investors.

Additionally, there are Mutual Funds, which pool money from many investors to be managed and diversified by professional fund managers, making investing easier for individuals without the time or expertise to monitor markets closely.

Equity Trading Markets: Primary vs. Secondary Market

The equity market has two main types based on the issuance and trading process.

Primary Market

The primary market is where companies issue new equities to raise funds directly from investors. This involves the initial sale of financial instruments. The money paid by investors goes directly to the company.

Companies can offer shares through:

• Private Placement (PP): Selling to a limited number of private investors, such as up to 35 individuals within 12 months or to financial institutions under regulations set by the Securities and Exchange Commission (SEC).

• Public Offering (PO): Selling to the general public, requiring approval and compliance with strict procedures by the SEC.

Secondary Market

The secondary market is where previously issued equities are bought and sold. It allows existing investors to sell their holdings to new investors, ensuring continuous capital circulation in the economy.

The secondary market is divided into three types:

• Thailand Stock Exchange (SET): For large companies with paid-up capital of at least 300 million THB, serving as Thailand’s main trading platform with high trading volume and importance.

• MAI (Market for Alternative Investment): For medium and small-sized businesses with high growth potential and paid-up capital of at least 20 million THB, suitable for investors seeking growth opportunities.

• Over-the-Counter (OTC): For direct transactions between buyers and sellers without going through the official stock exchange.

The SEC oversees all secondary market activities, while daily operations of the stock exchange are managed by the Stock Exchange of Thailand.

Benefits of Holding Shares and Equities

Investing in equities offers numerous benefits that investors should carefully evaluate.

Expert Management: Most equity funds are managed by experienced professionals, allowing investors to benefit from their expertise without needing in-depth market knowledge.

Diversification: Equities can include various types such as common stocks, preferred stocks, warrants, and derivatives, helping to balance your portfolio.

Risk Reduction through Diversification: Investing in equities helps spread risk across different assets, reducing potential losses from any single asset with gains from others.

Ease of Trading: Investors can buy and sell units easily without needing to monitor the market daily in detail.

Dividend Income: Investors can receive regular income from dividends, paid annually or even daily, providing steady cash flow.

Risks of Investing in Equities

Along with benefits, investors must be aware of the risks associated with equity investments.

Price Fluctuation Risk: Stock and equity prices are volatile and can rise or fall unpredictably based on market conditions.

Business Risk: A company’s ability to pay dividends, debt levels, liquidity, or legal issues can impact the value of equities.

Economic Systemic Risk: Macroeconomic events such as recessions, monetary policy changes, or political instability can affect the overall investment market.

Investors should review their investment performance every 3 to 6 months and adjust their portfolios according to current conditions.

How Do Equities, Bonds, and Stocks Differ?

To clarify, let’s compare equities with bonds and stocks.

What Are Bonds?

Bonds (Debt Securities) are financial instruments representing the creditor’s rights. When purchasing bonds, you lend money to the issuing company or government.

Bonds are generally less risky because bondholders are paid before shareholders if the company liquidates. Returns come in the form of regular interest payments, which are predictable.

Types of bonds include:

• Government Bonds: Issued by the Ministry of Finance or government agencies, with low risk and low returns.

• Private Sector Bonds: Such as commercial paper and corporate bonds issued by private companies, offering higher returns but also higher risk.

Direct Comparison

Contractual and Payment Differences

Equities: Holders do not have formal financial contracts like bonds. Their relationship is business and management-oriented. Shareholders are not guaranteed returns but depend on company profits and decisions.

Bonds: Holders have a clear financial contract with the issuer, including repayment terms, interest rates, and conditions. They have more certainty of returns.

Choosing the Right Equity Investment

The most suitable equity investments depend on your investment goals, time horizon, and risk tolerance.

If you seek higher returns and can accept moderate risks, and are willing to own part of a business, equities are the best choice. They balance risk and reward effectively, especially if you select companies with growth potential and credibility.

Remember to review your investment portfolio every 3-6 months to adapt to market changes and achieve your financial goals efficiently.