What Are Equities: Price, Types, Preference, Factors, & Formula


Although it is not a must to trade stocks, it can be good to know what a stock is. What does it mean to own shares and are there different types of shares? I go through what stocks are and learn the basics.

So, what are equities?

In short, an equity or share is an ownership interest in a company and when you own shares, you therefore become a partner in the company. In order for you to be able to buy shares in a company, the company needs to be a so-called limited company and the shares need to be listed on a stock exchange or a trading platform.

The reason why companies choose to issue shares is to finance the company, either when the company is formed or when they believe that new capital needs to enter the company.

Why do you want to own equities?

The simple answer is that you can make money by owning shares. You can do this either by the value of the share rising and you selling for more than what you bought for, or by taking part in the dividends on shares.

How do equities work?

When you buy a share, this becomes proof that you own part of the company. After you have bought the share, you will be registered as an owner in the share register, which is a register of all shareholders. The registration is made either by your broker or your bank.

Shares are not really something you can take on physically, but the stock trading is electronic and the shares are therefore registered in databases.

Previously, you received a share certificate that was a physical certificate of ownership that you owned the share.

Nowadays, the ownership certificate is called a settlement note and it is a receipt of how many shares you have bought or sold, at what price and what business and settlement date the transaction has.

You get access to the settlement note via your bank or the institution where you have the shares.

The factors that affect the equity price

To invest in shares, it may be worthwhile to understand what it is that affects the share price. Here are some factors that make the stock price move both up and down.

  • Corporate profits – a company’s profits are the core when you look at the company’s accounts. High profits create the opportunity for high dividends to shareholders. If expected earnings are high, this will have a positive effect on the share price.
  • Company acquisitions – in the case of acquisitions, a premium is usually paid on the share price, which means that the shareholders make a profit on their holdings. Rumors of such trill the price of the stock.
  • Dividends – the belief in increased dividends will increase the share price, as will the share price if the company is expected to distribute less money than expected.
  • Rumors / speculations – there is a lot of rumors and speculation about companies’ future and this will affect share prices, positively or negatively. This can create both opportunities and pitfalls, which means that you should be very careful when acting on these factors.
  • Foreign stock exchanges – since the stock market is global, the Swedish stock exchange will be largely affected by stock exchanges in countries with many owners on the Stockholm Stock Exchange. The best example is the USA, where many investors on the Stockholm Stock Exchange come from. Therefore, it can often be seen that the Stockholm Stock Exchange follows the development of the American stock exchanges.
  • Interest rates / economic cycle – the stock market reflects the well-being of the economy and therefore we can see that the stock market is doing strongly in a boom and worse in the opposite. It is important to remember that the stock market is ahead of the economy, precisely because the players are speculating about the future.

Different types of equities

There are different types of shares, A, B and C shares and preference shares. A-, B- and C-shares are also called ordinary shares, which is what you usually refer to when talking about shares in everyday speech. Ordinary shares are issued, among other things, when the company is started.

As I mentioned earlier, you are a partner in a company when you own shares and the letters indicate differences between the share types, for example how much voting rights you have at the general meeting.

The dividend, on the other hand, does not usually differ between different types of shares.

The companies themselves decide what the division of shares should look like and what rights each type of share should entail.

A common scenario is that A shares entitle to more votes at the Annual General Meeting, while B and C shares give fewer votes.

But what is the right to vote then?

Companies hold a general meeting every year to make decisions about the business and the company’s future, and when you own a certain type of share, you have the right to vote on various proposals at the general meetings.

This way, you can be involved in the company’s development.

What type of equity should you choose?

Should you choose A or B shares? If you want to be involved in the company’s operations and future, it may be an idea to check what each share gives for rights, if for example it is only A shares in the company that entail voting rights, A shares may suit you.

If you are a small saver, it usually does not matter what type of share you own, as it usually does not significantly affect the price or the dividend.

In those cases, B shares or C shares may suit you better.

B and C shares are usually owned to a greater extent by private individuals and are then traded more than A shares, which increases the chances of buying and selling shares in the company.

The difference between A and B equities

Why then are there different letters when it comes to stocks? The letters separate the shares and indicate the value of the shareholder’s vote during the Annual General Meeting.

An A share is valued higher than a B share, and a B share in turn higher than a C share.

The actual content of the share is the same regardless of whether you have an A or a B share. It is thus the voting right that is the difference between A and B shares.

The price is usually another difference between A and B shares. The share price, also called the share price, is based on demand and since a higher voting right gives more influence, Class A shares are usually more expensive.

There are also generally fewer A shares in trading, which increases the price.

As a small saver or beginner in equities, you usually do not need to worry about the voting rights of a particular share.

It is many times better to look at the turnover level of a certain share. A share with higher turnover is easier to sell in the future.

If, on the other hand, it is important for you to be able to attend the general meeting and voting, you should of course check which type of share you should buy in order to be able to do this.

What are preference equities?

A preference share is a special type of share that entitles the shareholder to a dividend before the ordinary shares (a-, b- and c-shares). The preference shares thus have something called preferential rights.

Most preference shares have a predetermined fixed dividend, unlike ordinary shares that have no such limitation.

How do I see what type of equity I have?

The share type is displayed in the share name, where the letter or definition is stated directly after the share name.

Example:

  • Investor A = A share
  • Investor B = B share
  • Amasten Holding Pref = Preference Share

Conclusion

Why should you own equities?

Owning shares is a way to give your savings an opportunity to grow. So you can make money on stocks.

You get the money either by taking part in the company’s distribution of profits to shareholders, or by selling the shares at a higher share price than what you bought them for.

Of course, it also entails a risk to trade in shares, but with a long-term investment plan, it can be both fun and exciting to see how the share price and your savings develop.

Sources

https://www.proquest.com/openview/9698ae2e5a7f9005fcf0647cb4f1e4d5/1?pq-origsite=gscholar&cbl=49137

https://jai.pm-research.com/content/12/3/76.short

https://link.springer.com/article/10.1140/epjb/e2004-00129-6

https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/small-business-and-the-new-issues-market-for-equities/6FB64DA41CF0DA103D86ADE4318B0139

https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2009.01469.x

https://www.tandfonline.com/doi/abs/10.1080/14697680903124632

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=388360

https://www.sciencedirect.com/science/article/abs/pii/S0022199603000151

Kevin

This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policies.

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