The Equities Market Explained

New York Stock Exchange

Equities are as they sound, an equity stake in a business. Also known as a share or a stock.


Purpose of Equities

Angel Investors

The owners and investors may want additional capital in invest in new projects within the company. Selling the company would represent a loss of control over the company.

Alternatively, by selling shares, they can sell part or all of the company to many part-owners and so keep control of their company and look to grow it with the further investment or simply sell out.

One Share

The purchase of one share entitles the owner of that share to literally a share in the ownership of the company, including the right to a fraction of the assets of the company, a fraction of the decision making power and potentially a fraction of the profits, which may be issued as dividends.

The original owners of the company often still have control of the company and can use the fresh investment to grow the company.

In the common case, where there are thousands of shareholders, it is impractical to have all of them making the daily decisions required in the running of a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors themselves, which over time has led to most of the top executives being on each others boards.

Each share constitutes one vote (except in a co-operative where every member gets one vote regardless of the number of shares the hold).

Therefore, if one shareholder owns more than half of the shares, they can out vote everyone else and have control of the company.

Board of Directors

History of Equities

The history of the US stock market can be traced to over 200 years ago, the colonial government decided to finance the war by selling bonds, government notes promising to pay out at a later date.

At the same time, private banks begun raising money by issuing stocks, or shares of the company to raise their own money. This was a new market and a new form of investing money, and ultimately a great scheme for the rich to get richer.

In 1792, a meeting of 24 large merchants resulted in the creation of the market, New York Stock Exchange (NYSE). At the meeting, the merchants agreed to meet daily on Wall Street to trade stocks and bonds on a daily basis.

1792 Wall Street

1792 Wall Street

In the mid 1800’s, the United States was experiencing rapid growth. Companies needed funds to help with expansion that was needed to meet the new demand. Companies also realised that investors would be interested in buying stock, partial ownership in the company.

History has shown that have facilitated the expansion of the companies and the great potential of the recently founded stock market and was becoming increasingly apparent to both the investors and the companies.

By 1900, millions of dollars worth of stock were traded on the street market. In 1921, after 20 years of street trading, the stock market moved indoors.

New York Stock Exchange

New York Stock Exchange

Progress brought us the industrial revolution, which also played a role in changing the face of the stock market. New forms of investing began to emerge when people started to realise that profits could be made by re-selling the stock to others who saw value in the company.

This was the beginning of the secondary market, known as the speculators market. This market was more volatile than before because it was fueled by highly subjective speculation about the company’s future.

Types of Equities

Ordinary Share or Common Stock

By far the most common security that represents ownership in a company. Holders of ordinary shares exercise control by electing a board of directors and voting on company policy. Ordinary shareholders are at the bottom of the priority ladder for ownership structure.

In the event of liquidation, ordinary shareholders have rights to the company’s assets only after the bond holders, preferred shareholders and other holders have been paid in full.

Preferred Share or Stock

A class of ownership in a company with a stated dividend that must be paid before dividends to ordinary shareholders. Preferred shares do not usually have voting rights.

Convertible Share or Convertible Preferred Stock

A preferred share that can be converted into an ordinary share.

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