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Equities can be characterized as stocks or shares in a company that investors can buy or sell.
When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.
However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.
When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling partial ownership in the company.
There are many reasons for individuals investing in equities. In the United States for example, equity markets are amongst the largest in terms of transactions, investors, and turnover.
Why Invest in Equities?
Overall, the appeal of equities the potential for high returns. Most portfolios feature some portion of equity exposure for growth.
In terms of investing, younger individuals can afford to take on higher levels of equity exposure, i.e. risk.
Consequently, these people have more stocks in their portfolio because of their potential for returns over time.
However, as you are planning to retire, equity exposure becomes more of a risk.
This why many investors or holders of retirement accounts transition at least part of their investments from stocks to bonds or fixed-income as they get older.
Equity holders can also benefit through dividends, which differ notably from capital gains or price differences in stocks you have purchased.
Dividends reflect periodic payments made from a company to its shareholders. They’re taxed like long-term capital gains, which vary by country.