Investors in equity securities have an ownership interest in a company. Whereas, investors in bonds issued by the same company receive a claim to a promised stream of cash payments up to a fixed period of time or maturity date. Equity securities participate in some portion, depending on classification, in a claim to receive an infinite sequence of residual payments based on the fortunes of the company. The company ownership interest or shares can be invested across all industries in the United States and abroad. Companies that compete with each other to provide similar goods and services comprise an industries or sector of the equity securities markets.
Equity securities which you will consider for your investment portfolio can generally be considered in one of the following categories:
While equity securities possess the greatest potential for economic gain, investors should be reminded of the lessons learned from investments made in “buggy whip” companies that went out of business after Henry Ford began the mass production of automobiles. Diversification will remove most of the risks of a single company’s collapse, however funds invested in a diversified portfolio are still subject to the risks of the overall market and economy. Investments in equity securities are made directly in shares of a company or through investments in diversified portfolios, such as:
- exchange traded funds;
- mutual funds;
- variable annuities;
- qualified retirement plans; or
- fee-based asset management accounts.
Some portion of the portfolio holdings should be invested in equity securities depending on the investment time horizon and whether there are sufficient investments in fixed income securities. The allocation of invested funds between equity and fixed income securities is the single most important investment decision in reaching your True North.
