Equities

Equities are an asset class of stocks, ETFs, mutual funds, and bonds where investors can invest money in publicly traded companies and sectors.
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The equity market provides investors multiple ways to invest in publicly traded companies. Investors can buy and sell shares of an individual company’s stock, trade a collection of companies or industries through ETFs and mutual funds, and invest in companies and governments with bonds.

Stocks

Stocks are shares of a company issued to generate capital for the corporation. Investors that purchase stock acquire an ownership stake in the company based on the number of shares they purchase. There are two types of stock: common and preferred.

Holders of common stock, called shareholders, own a portion of the company and have voting rights on corporate issues such as appointing members to the board of directors and takeover bids. Because of the voting rights of common stock, shareholders essentially control the business. Common stockholders may also receive dividends from the company.

Shares of common stock are issued in the primary market through an initial public offering (IPO) and then trade in the secondary market, typically on a stock exchange, through an intermediary known as a brokerage firm. Common stock is bought and sold on exchanges such as the NYSE or the NASDAQ, and these exchanges provide real-time pricing on the value of a company.

Common stock is generally referred to as a liquid investment because stockholders can liquidate their shares readily at market prices. Companies issue a finite amount of shares during their IPO and may issue more shares to raise additional capital later. The value, or market capitalization, of a company is found by multiplying the shares outstanding by the current stock price. Stock prices fluctuate continuously as investors evaluate the perceived future value of a company.

Investors purchase shares of a stock when they believe the company’s value will increase in the future.

ETFs

ETFs, or Exchange-Traded Funds, are a basket of securities like stocks, bonds, and commodities packaged together and traded on an exchange. ETFs typically represent an index or sector and are created by bundling together multiple securities into one tradable asset.

ETFs are bought and sold through brokerage firms during market hours, much like stocks. Unlike stocks, ETFs do not grant ownership to any of the underlying assets within the fund. Instead, the ETF tracks the overall performance of the combination of assets.

The amount of shares of the underlying security owned by the fund determines how much of the overall percentage of the ETF is invested in each individual security. In contrast to mutual fund shares, ETFs may be bought or sold at any time during market hours. ETFs are typically open-ended, and the fund’s management may create more shares as warranted by investor demand.

Mutual Funds

Mutual funds collect money from multiple investors and combine them to purchase securities such as stocks, ETFs, and bonds. Investors can buy shares of a mutual fund much like a stock but receive no ownership of the mutual fund. A mutual fund’s value is equivalent to the performance of the underlying assets owned and is tracked similarly to a stock.

The holdings in mutual funds are not actively managed by the individual investor. Instead, one or more money managers oversee the investments and make decisions on how and where to allocate the investors’ money.

The price of shares in a mutual fund are not calculated until after-hours, so, unlike stocks and ETFs, mutual funds cannot be traded during regular market hours.

Bond Funds

A bond is a fixed-income security that acts as a loan between an investor and a borrower. Bonds are interest-bearing or discounted government or corporation issued securities where a specified amount is borrowed and then repaid at maturity. Borrowers are typically companies or governments looking to raise money from investors in exchange for agreeing to pay back the loan in a specific time period at a predetermined or variable interest rate.

Bonds are fixed-income securities because they provide payment to the lender, with interest, for the duration of the bond. Bonds have a maturity date when the borrower must repay the lender the principal amount in full; if they do not, the bond will default, and the lender will no longer receive payments. This is why less creditworthy, riskier bonds typically yield a higher interest rate because the lender is being compensated for their level of risk.

The terms of the bond, such as maturity date and coupon rate, are stated in the bond indenture and represent a formal agreement between the lender and borrower.

Bond funds are a specific type of ETF or mutual fund that pool investor funds to purchase bonds. Bond funds pay interest on a monthly or quarterly basis. Bond funds are typically incorporated in investor portfolios that are seeking diversification, current income from interest payments, or a combination of objectives.

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FAQs

What is an equity?

Equity is the stake a shareholder has in a company. For example, stocks are shares of a company-issued to generate capital for the corporation. Investors that purchase stock acquire an ownership stake in the company based on the amount of shares they purchase.

Bonds, ETFs, and mutual funds also allow investors to gain exposure to the equity market.

What does it mean to invest in equities?

The equity market provides investors multiple ways to invest in publicly traded companies. Investors can buy and sell shares of an individual company’s stock, trade a collection of companies or industries through ETFs and mutual funds, and invest in companies and governments with bonds. Investors that purchase stock acquire an ownership stake in the company based on the number of shares they purchase.

How do you buy stock?

Stocks are shares of a company-issued to generate capital for the corporation. Shares of stock are issued in the primary market through an initial public offering (IPO) and then trade in the secondary market, typically on a stock exchange, through an intermediary known as a brokerage firm. Stock is bought and sold on exchanges such as the NYSE or the NASDAQ and these exchanges provide real-time pricing on the value of a company.

Investors that purchase stock acquire an ownership stake in the company based on the number of shares they purchase. Companies issue a finite amount of shares during their IPO and may issue more shares to raise additional capital at a later date. Stock prices fluctuate continuously as investors evaluate the perceived future value of a company.

What time does the stock market open?

The United States stock market, as defined by the NYSE and NASDAQ, has regular trading hours Monday through Friday. The trading session begins at 9:30 a.m. EST and ends at 4:00 p.m. EST.

What time does the stock market close?

The United States stock market, as defined by the NYSE and NASDAQ, has regular trading hours Monday through Friday. The trading session begins at 9:30 a.m. EST and ends at 4:00 p.m. EST.

Are ETFs a good investment?

ETFs, or Exchange-Traded Funds, are a basket of securities like stocks, bonds, and commodities packaged together and traded on an exchange. ETFs typically represent an index or sector and are created by bundling together multiple securities into one tradable asset and can be added to a portfolio to gain exposure to multiple markets.

ETFs are bought and sold through brokerage firms during market hours, much like stocks. Unlike stocks, ETFs do not grant ownership to any of the underlying assets within the fund. Instead, the ETF tracks the overall performance of the combination of assets.

The amount of shares of the underlying security owned by the fund determines how much of the overall percentage of the ETF is invested in each individual security. In contrast to mutual fund shares, ETFs may be bought or sold any time during market hours.

ETFs are typically open-ended, and the fund’s management may create more shares as warranted by investor demand.

What does ETF stand for?

ETF is an acronym for exchange-traded fund. ETFs are a basket of securities like stocks, bonds and commodities that are packaged together and traded on an exchange.

ETFs typically represent an index or sector and are created by bundling together multiple securities into one tradable asset and can be added to a portfolio to gain exposure to multiple markets. ETFs are bought and sold through brokerage firms during market hours much like stocks.

Do ETFs pay dividends?

Some ETFs pay dividends. ETFs represent a basket of securities. If the underlying securities held in the fund pay a dividend, the dividends are cumulatively held and paid out monthly or quarterly by the ETF with a ratio relative to the percentage owned of the dividend-paying security. 

How do you make money from a mutual fund?

Mutual funds may rise in value (capital appreciation) or pay distributions of dividends or interest (current income) to generate returns for investors.

Mutual funds take a collection of money from multiple investors and combine them together to purchase securities such as stocks, ETFs, and bonds. Investors can buy shares of a mutual fund much like a stock, but receive no ownership of the mutual fund.

The value of a mutual fund is equivalent to the performance of the underlying assets owned and is tracked similar to a stock. The holdings in mutual funds are not actively managed by the individual investor. Instead, one or more money managers oversee the investments and make decisions on how and where to allocate the investors’ money.

What are the four types of mutual funds?

Mutual funds are divided into four categories based on where they primarily invest money. The four markets mutual funds invest are equity, fixed-income, money market, and blend (a combination of stocks and bonds).

How do bonds work?

A bond is a fixed-income security that acts as a loan between an investor and a borrower. Bonds are interest-bearing or discounted government or corporation issued securities where a specified amount is borrowed and then repaid at maturity.

Borrowers are typically companies or governments looking to raise money from investors in exchange for agreeing to pay back the loan in a specific time period at a predetermined or variable interest rate. Bonds are fixed-income securities because they provide payment to the lender, with interest, for the duration of the bond.

Bonds have a maturity date when the borrower must repay the lender the principal amount in full; if they do not, the bond will default and the lender will no longer receive payments. This is why less creditworthy, riskier bonds typically yield a higher interest rate, because the lender is being compensated for their level of risk. The terms of the bond, such as maturity date and coupon rate, are stated in the bond indenture and represent a formal agreement between the lender and borrower.

Can bonds lose money?

Yes, bonds can lose money. Bonds have a maturity date when the borrower must repay the lender the principal amount in full; if they do not, the bond will default and the lender will no longer receive payments. This is why less creditworthy, riskier bonds typically yield a higher interest rate because the lender is being compensated for their level of risk.

If the bond defaults and the principal is not repaid, the investor will lose the amount they originally paid to purchase the bond. The terms of the bond, such as maturity date and coupon rate, are stated in the bond indenture and represent a formal agreement between the lender and borrower.

A bond’s market value can rise and fall based on many factors between issuance and maturity, such as interest rate fluctuations and perceived creditworthiness.

What are the five types of bonds?

There are many types of bonds. The most common include government bonds, municipal bonds, corporate bonds, investment-grade bonds, high-yield bonds, convertible bonds, and foreign bonds.

Government bonds are issued by the federal government through the Department of Treasury. Municipal bonds are issued by counties, cities, and states. Corporations issue bonds to raise money. Investment-grade bonds have a higher credit rating than high-yield bonds, but do not offer as high of an interest rate.

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