Equity is the ownership interest in a company or property, typically represented by holding stocks or shares. When investors buy shares of a company, they acquire a stake in that company's equity, making them part owners. This ownership stake entitles them to a share of the company's profits, which may be distributed as dividends, and grants them certain rights, such as voting rights at shareholder meetings. Equity is fundamental to the capital structure of a company, alongside debt, and is critical for financing business operations, expansion and development.
For investors, equity are a key component of portfolio diversification and offer potential for wealth creation. Investing in equities offers the chance for capital appreciation, as the value of a company's shares can increase over time based on the company's performance and growth prospects. While equities are known for their higher volatility and risk compared to fixed-income investments like bonds, they historically provide higher returns over the long term, reflecting the risk-return trade-off in investing.
However, investing in equity also carries risks, including market risk, company-specific risk and sectoral risk, which can lead to fluctuations in share prices. Investors must conduct thorough research and consider their risk tolerance, investment horizon and financial goals when investing in equities. Diversification across different companies, sectors and geographic regions can help mitigate some of these risks.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.