Whether you are just starting to consider investing or looking to expand your existing portfolio — you are in the right place. Equity securities, as well as other security types, are one of the most effective trading instruments. Today we will discuss everything you might need to know about successfully investing in securities equities in 2020.
What are securities?
First things first, what is a security? Securities are a class of financial instruments that can carry one of the following functions: representing an ownership position, a creditor relationship or a right to potential ownership.
Securities are fungible, negotiable and can be translated into monetary value. Fungibility means that securities are interchangeable with other financial assets. In simpler words it means that securities can be sold and purchased. And since they are negotiable, we can come to a conclusion that variations in value during the trading process can be turned into profit.
Although the most recognized types of securities are stocks and bonds, the complete definition of this handy instrument goes slightly beyond that. Let’s take a closer look at each category, starting with equity securities.
What are equity securities?
An equity security is designed to represent ownership interest in a company, a partnership or a trust. Security equity is represented by a share or several shares of the capital stock. Therefore, another name for equity securities is stocks. Absolutely any investor from anywhere in the world is able to purchase equity securities in any company that went public. But what’s in it for the company itself?
Successful businesses always aim to grow. And growth usually requires financing. There are a few options when it comes to seeking funding: lending money from a bank, cooperating with private investors or issuing securities or shares for anyone who’s interested. This way the company in question gets the required cash flow to become both more influential and more profitable.
And those who have invested are entitled to a variety of benefits. The shareholders, for example, get a certain portion of the company’s income. Depending on the type of share, the payouts can vary in size, frequency and additional conditions.
Owning equities securities, or stocks, is slightly different. Investors who choose equity security instead of a share are only able to gain from a company's income when they sell the security. This way securities become a pretty basic trading instrument: you buy them at low and sell at high. In some cases, however, securities equities can give their holder a specific level of control via voting rights, which become necessary during crucial decision-making for the company. And in case of bankruptcy, the security holders are entitled to less compensation than shareholders.
Investing in equity securities is generally a good idea for all types of traders. It’s relatively hassle-free and doesn’t require incredibly in-depth knowledge of the market or global economy. With that said, it is still important to keep learning more about the equities securities you possess, to make sure you are profiting the most optimal way.
Further on we will explore how to trade equity securities successfully, but before we do, let’s discuss other security categories available at the market.
Other Types of Securities
As previously mentioned, the term security can represent a number of concepts. If you choose to invest in a security equity, deep knowledge of other types is, of course, not necessary. But it is still important to have a general understanding in order to avoid confusion during research and analysis of the market. So, here they are:
The simplest way to explain debt securities is a loan contract. When money is borrowed it has repayment terms, including the interest rate, full size of the loan and the deadline of when the payment is due. Debt securities are widely known as bonds, and they are normally issued by governments as a way of accumulating funds.
While seeking financing, a government creates bonds that can be purchased by large-scale, institutional investors. The money from the sale is used for funding, and the bond purchaser later profits off the interest that applies at the moment of repayment.
A subcategory of debt securities is called fixed-income securities. The main difference is that this particular instrument provides fixed payments over a fixed schedule. As an example, a borrower is obligated to pay interest monthly, while only having to return the principal amount when the debt matures (reaches its expiration).
Judging from the gravity of bonds: governments dealing with large financial institutions, it is easy to conclude that debt securities trading is far less casual than investing in securities equities. But there are still ways to benefit from debt securities on an individual investor level.
One of such ways is trading exchange-traded funds (ETFs). When investing in an ETF, you won’t get access to profit directly off the underlying asset, but rather off the gain in its overall value. For instance, the Vanguard long-term bond ETF’s objective is to observe performance of the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index. By providing diversified exposure to the long-term investment-grade bond market of the United States of America, this ETF guarantees its investors high current income.
When an equity security possesses some qualities of bonds, this instrument is referred to as hybrid security. One of the examples of such hybrids are options that give a purchaser the right to buy a stock at the specific rate at the specific time, these are referred to as warrant equities. There are also convertible bonds that can shift into common stock shares and preference shares, which give their holders a privilege of being reimbursed before any other shareholders.
Similarly to bonds, mortgage-backed securities (MBS) holders benefit from someone else's loan relationships. But in this case an investor is buying a basket of real estate loans from a bank. This way, a bank has more financial assets to operate with and the investor profits off regular payments specified by mortgage agreements.
The way mortgage-backed securities work basically turns banks into middlemen that benefit on several levels. Apart from gaining income from the sale, the bank in question will also nor face any losses in case the home buyer fails to fulfill the agreement.
An interesting fact about MBS is that they played the main role in the financial crisis that began in 2007. What happened in a nutshell, was banks lowering the rates for mortgage-backed securities in the conditions of a rapidly growing real estate market. Eventually it led to a significant decrease in overall quality of MBS and the massive unprecedented collapse of the housing market.
Mortgage-backed securities are still traded, although the lesson seems to have been learnt, and they are much more heavily regulated than before. MBS are always going to remain an investment option for as long as potential and existing homeowners will be willing to use mortgage.
Marketable securities isn’t a separate category of securities, but rather a characteristic that both debt and equity securities can be described with. The word marketable in this case is used to describe the high liquidity. Marketable securities can be easily and quickly converted into cash, usually at a very reasonable rate.
This escalated liquidity comes from the maturity limits of any specific equity or bond. When the repayment deadline is less than one year, the security is most likely marketable. But why do they exist next to long term bonds and highly profitable equity securities?
Every well-organized business has some sort of financial reserve for scenarios in which fast reaction is required. Such as rapid expansion or acquisition of other companies. However, letting the money passively lie around is very unwise. So, instead of setting the funds aside, companies turn them into marketable securities and earn profit off their movements on the market. And then when the necessity arises, the marketable securities are painlessly liquidated.
Pretty much any not restricted financial instrument that can be bought and sold at either the stock exchange or the bond exchange, is a marketable security. The success of the marketable securities is based on the existence of a secondary market, where they are actually traded at precisely announced rates. Large scale investors rarely take interest in marketable securities, due to low returns caused by high liquidity. But individual investors can absolutely find a way to benefit from such short-term instruments.
Advantages and disadvantages of trading equity securities
Now, since you are comfortable differentiating various security types, it is time to circle back to the main theme: buying and selling equity securities. Before we go into the technicalities of the investment process, let’s briefly look over some advantages and disadvantages of investing in security equity.
One of the main advantages of security trading is portfolio diversification. Professional investors tend to spread their interest over different fields, using different instruments. For instance, any stock investor will most likely be involved in currency trading and a Forex trader will eventually start to expand horizons beyond just cash.
Another great aspect is the amount of information and tools available for productive investing. This means that no matter how inexperienced you are, there is still a very good chance that you can become a real professional. Of course, this means that you will need to invest not just your money, but also a certain amount of time and effort to master operating with every specific instrument.
Which brings us to the next point, not a disadvantage, but a challenge. Depending on how fast of a learner you are, it might take longer than expected to become a profitable investor. The process will include things such as learning, getting familiar with the slang, finding trustworthy sources of new information and so on. Yes, it will be time-consuming. But it will also be rewarding.
The better you understand the entire investment scene in general and your chosen instruments in particular, the more opportunities are going to unravel in front of you. The good news is, as long as you are dedicated to getting positive results and don’t give up after the first bump, you’ll succeed. So, gather all your patience and dive in little by little, while always keeping in mind that there is treasure ahead.
Once you get your mindset figured out, there is nothing else to do, but start investing. Next we are going to talk about every step you’ll have to take in order to become a profitable equities securities investor in 2020.
How to Buy and Sell Equity Securities
We have established that the foundation of trading securities equities, or any other asset for that matter, is knowing everything there is to know about your instrument. Although we did cover a lot about securities today, there is still a lot to learn. Start by browsing your broker’s site for more information and don’t hesitate to get in touch with the team to find out more.
You will need to decide which particular stocks you are looking to invest in. Equity securities can vary based on location, industry, sub industry and more. The most logical solution at first is to go with the flow and put your trust into the companies that are visibly successful. Just pause for a moment and think which company in your opinion is constantly delivering great result rates, even through crisis times?
Most likely, companies like Microsoft Corporation or Apple Inc. pop into your mind, which is absolutely correct. Both of these are positioned in the field of technology and this industry has been proven to be the modern number one necessity. Still having a hard time deciding? Go over fundamental analysis reports on your broker’s site. There you will get a professional insight on most hot topics of everyday economy and maybe even get inspired with which stocks to trade.
After you get an understanding of which company’s equity securities you are interested in, take the following steps.
Open your investment MT4 equity securities account
An investment account is your central point for pretty much anything trading-related. Whether you are looking to invest in equity security or any other instrument, start by finding a broker who will fit your requirements. Ideally you should be getting access to a lot of things at no charge. Those can include demo practice accounts, signal sources, tool suggestion, technical summaries and more.
A good broker will also suggest several account types with different options for the initial deposit amount, position sizes and service charges. Remember how we said that anyone can become an investor? Well, that’s just another point towards that statement: with whatever little starting capital you can reach significant heights, provided you keep on learning and gaining access to the most advanced tools via your broker. Got an account? Great. Now, put it to use by downloading the trading terminal.
Download MetaTrader 4 stocks and shares trading platform
You know what trading looked like some 30 years ago? Pretty horrifying, actually. Hundreds of people yelling and shouting on their phones over at the trading pit somewhere on Wall Street. Back then all you could do to invest in a currency or a stock is to make a phone call to one of those yellers. Luckily, today it is completely different.
By downloading a Metatrader 4 platform for free, you get access to a full collection of different time frame charts, real-time price quotes as well as numerous additional tools, such as technical indicators, calculators and so on. The best thing about MT4 is that it’s simple enough to operate, yet sufficient for even the most experienced traders. It will take you less than half a day to get comfortable using the platform, which is great because you’ll need that time for the most important step: placing your first equities securities trade.
Place your first security equity trade in the MetaTrader 4
The technical side of investing is straight to the point: with just a couple of clicks you are in. But the process leading up to those clicks can be rather long. Deciding when you will place a trade, how much you will invest and when and how you will close it are the basics of trading any instrument.
In order to make sure you gain profit from whichever transaction, you need to know why it is a good idea to do it the way you want to. That’s where trading strategies come into play. A trading strategy, also known as a trading method, is a series of steps that a trader takes to open and close a trade.
Such steps can include finding specific signals on the chart, waiting for a certain indication from an add-on, calculating the amount of points that you want to pass before gathering the profit, securing your rare by establishing risk management techniques and so much more. Knowing what to do at any point of your journey is crucial, so take your sweet time finding a strategy that fits your personal goals and abilities.
Buy and sell equity securities with PaxForex
PaxForex knows that starting your investing journey isn’t always easy. There is so much to learn and filter out, before you can see any results. So, we’ve made it our mission to simplify the process of preparing for the trade as much as possible.
Come for free analytical reports of most attention worthy trading instruments and stay for convenient selection of account types. Our team is always ready to guide you by providing the best tools at the market and giving the most insightful professional advice.
Trade currencies, cryptocurrencies, equity securities from the comfort of your home or office and always feel free to reach out for more helpful information.