Table of Contents
What are equity investments?
Buying equities in publicly traded companies
Investing in private company or startup equity
Private equity and venture capital
Other uses of the word “equity”
What are equity funds?
The bottom line
Jun 21, 2022
6 min read
Equity investment is a way of diversifying and mitigating risk, and investors often alter the mix of investments. Find out some ways to invest in equity.
The word “equity” is an investment term related to ownership that also has a number of other meanings depending on the context. Pay equity means compensating employees the same amount when they perform the same job. Home equity is the difference between what a homeowner owes on a mortgage and the value of the home. Equity, meanwhile, is a branch of law that developed with common law to correct for unfairness.
In finance, equities are shares in the ownership of a company. This represents the amount of money that would be returned to shareholders if the company’s assets were liquidated, after the debt was paid. Although “securities” and “equities” are generally not used interchangeably, the terms “stock” and “equity” often are.
Investors buy equities, or shares in companies because they expect the company’s value—and the value of their shares—will rise. Investors profit if they can sell their shares for more than the cost, resulting in capital gains. The downside is the risk that investors lose money if the value of their shares declines.
Most investors buy equities in publicly traded companies listed on a stock exchange, such as the New York Stock Exchange. To buy shares, investors can place a purchase order on a web-based brokerage platform or even a trading app on a mobile phone. They also can purchase shares by placing an order with a traditional broker.
Buying publicly traded equities on an exchange has a number of advantages: the purchase is quick, costs are generally low and the price is publicly available to all investors. There’s one more advantage: Most shares traded on exchanges are highly liquid and can be sold as easily as they can be bought.
Startups often compensate early employees and investors with the right to buy shares, or “equity,” in the company when they lack the cash flow to pay market-rate salaries. Those who have equity may then be able to sell their shares to other investors. Some investors buy stock of a private company that intends to go public as an investment strategy, anticipating a rise in value when it is listed on a stock exchange.
Investing in the equities of private companies differs in a number of ways from buying shares in public companies, but the main difference is that private company stock is not listed on an exchange. To sell, shareholders must find a buyer for their stock, and the company must approve the sale.
There are three ways for individual outside investors to buy equity in a startup:
Individual investors can invest in startups via crowdfunding sites, although theSEC limits the amount individual investors can pour into one of these sites in a 12-month period.
Investors can purchase shares in a startup at a fixed price by investing in a priced equity round. This price is made by agreement, and investors are generally accredited and invited by the company. There are exceptions to this rule: According to the SEC’s Regulation D Rule 506, a company can sell its securities to an unlimited number of accredited investors and up to 35 non-accredited investors, as long as they have sufficient knowledge to be considered capable of evaluating the risk.
Investors can buy convertible securities, or an investment that eventually converts into equity. Convertible securities, like convertible notes, are often found in seed- and early-stage investments. Priced equity rounds are more common to later-stage startups. Regulation D allows several exemptions for non-accredited investors, although it is much easier for investors to buy notes when they meet the accreditation threshold.
“Private equity” also refers to the way a company is valued when it is not publicly traded. A company’s book value is calculated by subtracting liabilities from assets; the equity is this sum. Unlike shares of publicly traded stocks, private equity is not available to just any investor.
In general, only so-called accredited investors, meaning wealthy individuals or entities allowed to buy or invest in securities that are not registered with financial regulatory agencies, can invest in private-equity or venture-capital partnerships. The current threshold for an individual accredited investor is a net worth of more than $1 million; special employee certification; or for a business, a valuation of at least $5 million. Investors who don’t meet these criteria can invest in exchange-traded funds (ETFs) that invest in private companies.
Even within the financial realm, the word “equity” takes on different meanings. Here are some common uses:
A homeowner’s equity is essentially the portion of their home that they own. It is calculated by subtracting the amount the owner owes on loans associated with the house from its appraised value. For instance, consider a homeowner who bought a house for $150,000 and still owes $50,000 on a mortgage. The market value of the home has risen to $250,000. The homeowner’s equity is the difference between what the house can be sold for and the amount still owed, or in this case, $200,000. Home equity can be useful in securing a home equity loan (also known as a second mortgage or a home equity line of credit).
Equity is shown on a company’s balance sheet; it’s one of the most common metrics analysts and investors use to evaluate a company’s financial health. This number represents the shareholders’ stake in the company. It is calculated by subtracting total liabilities from total assets. Since equity is the number owed by the business to shareholders and owners, equity is considered a type of liability. Equity is used in financial ratios such as return on equity (ROE), a widely used measure of corporate profitability derived by dividing a company’s net income by shareholders’ equity.
Equity funds are a kind of mutual fund that uses money from multiple investors to buy stock in a range of companies. Equity funds are the most popular of mutual funds and are promoted to investors who prefer to have a manager invest for them. Some hallmarks of equity funds are:
Equity investments made through mutual funds spread assets across companies, which limits an investor’s exposure and helps diversify an investment portfolio. On one hand, this limits risk; on the other, it also limits dramatic gains.
Equity mutual funds can be categorized as large-cap, mid-cap, and small-cap, based on the market values of the companies in the fund. Often the companies in a fund are alike in some way; for instance, the fund might invest in companies listed on the S&P 500 or invest in companies in a certain sector, such as health care or technology.
Equity mutual funds are selected by investors who have little time to manage their investments or would rather have someone do the job for them.
There are many ways to invest in equity: buying shares of public or private companies, investing in equity funds, or being compensated in equity as an employee. Equity investment is a way of diversifying and mitigating risk, and investors often alter the mix of investments, including their equity exposure, over time as they near retirement age.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
How to Invest $2,000
Investors with $2,000 have several options: high-yield savings accounts, index funds, actively managed funds, robo-advisors, stocks, and real estate investment trusts.
Understanding Portfolio Construction: How to Diversify and Assess Risk
Constructing a portfolio that minimizes risk while maximizing potential gains is a delicate and ever-changing balance. Learn about the process of creating a portfolio.
What Are Interval Funds and How Do They Work?
Interval funds are investment companies that combine characteristics of both open and closed-end funds. Investors can buy them at any time but sell them at certain intervals.
How To Invest In REITs
Some REITs are traded on major stock exchanges, giving individual investors the opportunity to invest in real estate without needing to buy or manage the property.
© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at firstname.lastname@example.org. 508 LaGuardia Place NY, NY 10012.