Equity Security
Equity Securities represent an ownership position or equity in a corporation. Ownership interest in a corporation is evidenced by shares of stock. Each share of stock represents a predetermined fractional ownership interest in a company. In the past, shareholders received an actual paper stock certificate stating the number of shares owned. Today share ownership is recorded electronically. A holder of stock of a corporation is known as a stockholder or shareholder.
The share of ownership affords the owner of the stock the right to attend shareholders meetings, the right to vote on matters presented by Board of Directors, and the right to receive any dividends paid.
Common Stock vs. Preferred Stock
There are two kinds of stock. Common Stock and Preferred Stock. The most common Equity Security traded is Common Stock, representing a predetermined fractional ownership of a corporation (i.e. if a corporation has 1000 authorized and issued shares of common stock and you own 10 shares you own 1% of the company).
Preferred Stock has a priority claim on the dividends paid and has a priority claim on the value of the assets if the corporation is liquidated. Preferred Stocks are a hybrid security having characteristics of both bonds and common stock and are usually owned by other corporations because of the preferred tax treatment given to the dividends.
Buying and Selling Securities
Public stocks are traded on stock exchanges, and are purchased and sold though licensed stockholders.
Equity Securities that are available to the public must be registered with the Securities and Exchange Commission and the company must file periodic financial statements with the Commission, and the reports are available to the public.
Tax Consequences of Equity Ownership
Dividends received by an investor are taxed as ordinary income, subject to the current year tax rates, in the year received regardless if they are automatically reinvested.
Stock gains are taxed at the time of sale or disposition. If held up to a year the gain will be taxed at ordinary income rates, but only at the time of sale. A loss in value will be a write off against capital gains on the year of sale. Although capital Loss deductions are limited to $3,000 per year, the unutilized balance can be carried over to subsequent returns indefinitely.
Risk
Stockholders share in the increase or decrease in the value of the company in which they hold the stock. The fluctuation in the value of the stock is dependent on a number of variables; condition of the economy, the nature of current markets, investors’ perception of the company future and earnings potential, the company’s financial position, economic cycles, as well as many other factors.
Investors generally purchase equity securities with two objectives: Dividends and growth in value. Receiving dividends from the profitable operations of the company, and sharing in the growing value of the company.
Individual Stocks are inherently risky and should be held as part of a diversified portfolio designed to carefully meet the investor’s tolerance for risk. Never own stock that interferes with a good night’s sleep; observe the old market adage… “Sell to the sleeping point”.
Getting expert financial help
Successful investing in stocks requires analysis, planning, and most importantly, expertise. It is critical to seek the advice of a professional financial planner to help you identify your financial goals, plan your investment strategy, and execute the best investment plan that meets your financial goals.