Equity investments: what are the different types?

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When you hear “equity investments” your mind probably jumps directly to buying stocks.

This isn’t wrong. Buying shares in a company’s stock is an equity investment. There are, however, a few different types of investments that could be described as “equity” or “equities”.

Here, we’ll offer a brief introduction into each of these.

What do we actually mean when we say “equity investment”?

Having an equity investment means you own part of an asset. If you’re a homeowner, you’ll be familiar with this concept. The equity you have in your property is the difference between its value and how much you still owe on your mortgage.

In the case of a stock, you take ownership – i.e., equity – of part of a company by buying shares. Having equity in a company means owning part of its profits, which you may realise through the payment of distributions like dividends. It also means being able to have a say in how a firm’s run through voting at shareholder meetings.

As mentioned above, the most common form of equity investment is buying shares in well-known public companies. There are, however, a few other equity investments that you may want to familiarise yourself with.

The different types of equity investments

Below is a description of different types of equity investments. This list is not exhaustive but reflects the equity investments you’re likely to come across as a retail investor.

Common shares

Most shares listed on major stock exchanges are common shares. If you own common shares of a firm, you own part of the company.

As noted above, owning common shares means you’re entitled to vote on resolutions presented at shareholder meetings. So long as you meet certain criteria, you’ll also be entitled to receive dividends (if the company pays them out).  

Preferred shares

Preferred shares are also traded on exchanges. Like common shareholders, owners of preferred shares also own a stake in a company.

However, these shareholders rank higher than common shareholders when it comes to being paid dividends. In other words, it is more likely preferred shareholders will be paid a distribution by a company.

On the other hand, preferred shareholders often don’t have the rights to vote on company resolutions. Historically, preferred shares also haven’t appreciated in value as much as common shares have (though remember, past performance is not an indication of future returns). This, combined with the more reliable dividends, has led to many people describing them as “bond like” investments, despite being an equity asset.

Equity REITs

Shares in equity real estate investment trusts (REITs) can be bought on exchanges. Equity REITs buy commercial properties – like offices or shopping centres – and aim to generate income via the rents collected from these. This is then distributed to shareholders.

Some equity REITs will focus on a specific type of property – for example, they may only purchase retail locations. Others will opt for a more diverse set of assets so that the portfolio spreads its risk across different sectors.  

Equity ETFs

Equity exchange-traded funds (ETFs) offer diversification by offering exposure to multiple stocks. Shares of ETFs trade on stock exchanges and can generally be bought any time the markets are open.

As with other fund products, when you buy a share of an ETF your money is pooled with that of other investors and used to purchases assets that make up a portfolio. In the case of equity products, the ETF will be invested in stocks.

Many, but not all, ETFs are indexed products, meaning they’ll attempt to closely track an index – like the FTSE 100 or S&P 500 – with the goal of replicating its performance. This contrasts with active mutual funds, which are explained below.

ETFs can get niche. You can find products investing in stocks based on factors including geography, market capitalisation, industry sector or emerging trends/themes.

Equity mutual funds

As the name suggests, equity mutual funds are also fund products where investors have their money pooled together to purchase stocks. Unlike ETFs, they don’t trade on exchanges, so investors have to purchase their stake in them directly from fund providers.

People often associate mutual funds with active management, meaning there’s someone buying and selling stocks based on what they think will generate the greatest return. Some, however, do track indexes.

Mutual fund managers usually invest according to a certain “style”. They may, for example, focus on large-cap stocks or stocks from a certain region.

Investment trusts

Sitting somewhere between ETFs and mutual funds are investment trusts. In short, these are public limited companies that exist specifically to invest in other companies as a way of making money. Buying shares in an investment trust, therefore, gives you exposure to a group of equity investments.

Like a mutual fund, investment trusts will have a manager overseeing decisions about which companies it invests in. Like an ETF, shares of investment trusts trade on exchanges.

Knowing the difference

It’s important to know the different types of equity investments when it comes to building a portfolio. Each of the above have different return profiles and fees associated with them.

A lot of people will say your portfolio should have X% in equities and X% in fixed income or cash depending on your personal situation. Dig deeper, however, and you’ll see that these terms describe a variety of investments. Once you understand each of these a little better, you can make more informed decisions about where you put your money.