Equity is important because it represents the real value of your actual stake in an investment. Investors who hold stock in a company are usually focused on their own personal equity in the company.
This is represented by the shares that are owned. Yet, this kind of personal equity is a function of the total equity of the company itself, meaning that a shareholder concerned for their own earnings will necessarily be concerned for the company itself. Owning stock in a company over time will ideally yield capital gains for the shareholder, and dividends may also be issued as well depending on the company’s investment structure.
It also often gives a shareholder the right to vote in Board of Directors elections, and all of these benefits further entice a shareholder’s personal interest for the company, both through continued involvement and through personal gain. Further to this point, gains from stocks sold are considered to be capital gains as mentioned above.
A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes. A capital loss is realized when there is a decrease in the capital asset value compared to an asset’s purchase price. The difference in the two, besides the time frame, is the way that these gains are taxed according to the tax code. Consult your accountant to know what you would personally be responsible for when it comes to short and long-term capital gains.
If the thought of investing in the stock market scares you, you aren’t alone. False promises and highly public stories of investors striking it rich or losing everything skew perceptions of the reality of the average investor. By understanding a little more about the stock market – and how the stock market works – you’ll likely find it isn’t as scary as you may think and that it’s a viable investment.
Here’s some good lingo to know when it comes to determining fundamental potential:
10-K Filing: A comprehensive report of a company’s annual performance filed at the end of the fiscal year. 10-K filings typically include information about a company’s structure, equity, and earnings.
10-Q Filing: A comprehensive report of a company’s quarterly performance filed at the end of each quarter. 10-Q filings include the same type of information as a 10-K. There is no 10-Q filing at the end of the fourth quarter because that is when the annual 10-K filing is required.
8-K Filing: A report detailing important, material, unscheduled corporate events. 8-K filings could include information regarding acquisitions, major contracts, addition or resignation of directors, etc.
Blue Chip Stock: Stocks of large, well-established and financially-sound companies which hold a record of consistently increasing the rate of paying dividends over decades to its stock holders. Blue chip stocks typically have a market capitalization in the billions and tend to be one of the leading companies in a sector.
Float: The total number of free trading shares of stock available to the public. The float is calculated by subtracting all restricted stock and insider shares held by officers and directors of the company from the total number of outstanding shares.