What Are Stocks and Shares?

Equities form the foundation of most investment portfolios. If you’re not familiar with the term, you might know it better as company stocks or shares. 

Equities essentially represent ownership in a company, whether it’s a publicly traded firm like Microsoft, Apple, or Walmart, or even a private enterprise that isn’t available on the stock exchange.

Public vs. Private Equities

Public companies, like the ones mentioned, are listed on stock exchanges allowing the public to buy and sell shares making them easily tradable. On the other hand, private equities represent ownership in private companies, perhaps a business you started yourself or invested in through a friend. Unlike public companies, these private investments are not available on exchanges and cannot be traded in the same way.

A company’s ownership is divided into equal parts called shares. The total number of these shares is referred to as the shares outstanding. The more shares an investor holds, the larger their ownership stake in the company. For instance, if a company has 100,000 shares outstanding and you own 1,000 of them, you own 1% of that company.

What Are Share Prices?

When we talk about equities, the price of each share is what’s usually being talked about. For example, if a company’s share is priced at $10, that means one share in that company is worth $10. But don't be fooled into thinking that the share price alone determines a company's worth.

Here’s a common trick question: If Netflix is priced at $10 per share and Tesla at $20, which company is more valuable? 

The answer isn’t so straightforward. The share price alone doesn't reflect the total value of a company. To determine a company’s market value, you need to multiply the share price by the total number of shares outstanding. This calculation gives you the company’s market capitalisation or market cap.

For example, if Netflix has 100 shares outstanding at $10 each and Tesla has 50 shares at $20 each, both companies are worth $1,000 overall, despite the difference in share prices.

Types of Shares

Equities generally come in two main types: common (or ordinary) shares and preferred (or preference) shares. When you’re trading equities, you’ll most often be dealing with common shares. These come with voting rights at shareholder meetings and represent a basic ownership stake in the company.

Preferred shares, on the other hand, typically do not offer voting rights but do have some advantages. They rank higher in priority when it comes to dividends and in the unfortunate case of liquidation. Preferred shares can also sometimes have a fixed dividend yield, making them a blend between a bond and a share in terms of their characteristics.

Dividends

Dividends are payments that companies make to shareholders as a distribution of profits. Not all companies issue dividends, but for those that do, it's a way for investors to receive income from their shares without having to sell them. 

Dividends are typically paid as a fixed amount per share, and the dividend yield indicates how much dividend you’d receive as a percentage of the share price. For example, a 5% dividend yield means the dividend payment equals 5% of the share price.

Trading Equities

When trading equities, it’s important to understand that individual stocks may not see as much price activity on a daily basis compared to other assets.  This means that equity price charts can sometimes show large gaps in data, which may impact technical analysis.

Spreads, which is the difference between the bid and ask price, can also be wider which gives them a higher transaction cost.

For the Duomo Method, we focus on markets that remain relatively stable most of the time. Equities, especially those with small market capitalisations or lower trading volumes, can be more prone to herd activity, where investors follow the crowd, causing rapid price movements. 

Therefore, it’s often best to stick with blue-chip companies like Tesla or Apple for trading, which have large market caps and higher daily trading volumes.