What is Equity?
Equity is an ownership stake in a company. An individual is considered a shareholder and has equity in a company if he/she owns company shares. Equities, also known as stocks, are a type of security.
When a company lists on the securities exchange, it offers a portion of its shareholdings (shares) to the public, allowing anyone to buy and sell them. It gives the opportunity for anyone to own a piece of a company.
In some cases, shareholders have the right to vote during annual meetings on company matters. Shareholders may even be entitled to receive dividends from a portion of the company’s profits, depending on the company’s dividend policy.
How does a company go public?
When a privately owned company has been in business for some time and is established in the market, it can pursue becoming a public company, meaning that it can offer its shares to the public to raise more capital to expand.
When a company decides to go public, it goes through a transformative period where it undergoes significant restructuring to operate in a manner that conforms with the regulations and standards expected of a publicly listed company. After completing its transformation, the company will seek approval from the regulatory authorities and make sure they adhere to the listing regulations. Companies who manage to proceed with going public are also referred to as issuers.
The next step is to raise additional capital to expand its operations. Companies go through a fundraising process called an Initial Public Offering, also known as an IPO. During this phase, they issue a prospectus document detailing various aspects of their business, fundraising objectives, amount and pricing for the public to review. The public is also allowed to participate in the IPO fundraising activity and show their interest by subscribing to shares of an IPO. Any shares that are successfully allocated during the IPO can be traded when the company lists on the exchange.
Shortly after the IPO phase, the company can finally list on an exchange where its shares can be bought and sold by the public. From then on, the company is expected to conduct itself with the highest standards and fulfill its continuing obligations such as providing regular reports to the public.
What does a listed company do?
From the view of an investor, a publicly listed company is expected to fulfill its fiduciary duty and to perform financially well to survive in the long term and for its value to appreciate over time. The company is responsible for ensuring that its growth, profitability, and future progress are all fulfilled in the best interests of its investors. Investors expect the companies they invest in to be stable businesses to potentially achieve long-term gains.
Companies are required to provide regular reports and disclosures that include information on their
financial statements, annual reports, information on the board of directors, and any other relevant
information. This information is made available to the public, allowing prospective and existing
investors to understand the company and make informed investment decisions.
What are the benefits of Equity investment?
The main advantage of an equity (stock) investment is the potential for capital appreciation, where a company’s sustained revenue growth and operational success drive an increase in its share price. This allows shareholders to capture a profit on their initial investment.
Companies may even regularly distribute dividends to their shareholders. Investors may see certain stocks as an attractive investment as well as a passive source of income. While not all companies may choose to distribute the profits this way, it is ideal for a long-term investor who looks for price appreciation and yield.
For those seeking a more diversified approach, owning stocks allow an investor to own small portions of different public companies, rather than being tied up to a single physical asset like property or a private business.
What are the risks?
It is important for everyone to understand the risks of equity investment. Risks are attributed to a variety of factors and may lead to fluctuations in the company’s share value. Investors must be mindful of this and be prudent with their investments. To keep updated on the performance of a stock, investors can take advantage of the information that is made available to the public by the company and through official sources.
The performance of the company is an important factor to consider as it influences trading strategies and habits. Information from the company and other various media sources may impact a company’s share value and cause it to fluctuate. Reports on a company’s revenue and profitability are some of the ways an investor can measure how well the company can sustain itself.
Companies also strive to remain relevant in their respective industry sectors to ensure that they maximise profitability and experience longevity. Competition from other market players can cause investors to change their market outlook and influence them to buy or sell sporadically. In some instances, competition may result in a drastic decrease in the value of one stock over another, shrinking prior market gains.
The overall economy also plays a role in market stability and for the securities listed on the stock
exchange. Even though there are a variety of different risk factors that contribute to volatility in the
market, the stock exchange represents a stable and regulated marketplace for investors to trade.
How should one approach investing in Equities?
For those who are interested in investing in equity stocks, it is important to research the companies that you are considering investing in. During the IPO phase, Issuers will release a document called a prospectus. An IPO prospectus typically contains information about a company’s business model, financial statements, IPO price, shares to be allotted, and the risks involved with investing in the company. The prospectus also contains information about the company’s management team and the sponsors and underwriters managing the offer.
The IPO is a market activity where issuers decide to sell their shares to fundraise from the public. There is a subscription period (e.g. approximately 1 to 2 weeks) where shares are offered to the public. Any shares that are successfully allocated to an investor from an IPO subscription can be traded when the company lists on the exchange. Investors can participate in both IPO and market trading.
When trading, always be aware that companies will disclose all the necessary business and financial information to the public through official sources. Regularly reading of a company’s financial statements, analyst reports, and monitoring the company’s performance allows investors to be informed and provides guidance in making appropriate investment decisions. There is also typically a lot of news generated around the company’s business and finances, during the IPO, that can be referred to.
It is critical to always be aware that any investment has its associated risks. It is also good practice to stay updated about any matters that may affect one’s equity investment and take necessary actions to reduce the risks involved.
For additional guidance, the supporting industry participants in Brunei Darussalam are also strategically set up to educate and convey advice on financial matters. These include licensed financial institutions such as banks, securities firms, and financial advisory firms.
Disclaimer: the contents are for educational purposes only. We do not offer investment advice.
Consult a financial advisor before investing. Not for redistribution.