What are equity securities?

Equity securities represent ownership in a corporation, which distinguishes them from other types of financial instruments. When an individual purchases equity securities, such as common or preferred stocks, they become a shareholder and gain a claim on a portion of the company's assets and earnings. This ownership also entitles them to participate in potential profit distributions, commonly known as dividends, and to vote on important company matters, such as the election of the board of directors.

Understanding equity securities is crucial for investors, as they provide opportunities for capital appreciation if the company performs well. Unlike debt instruments, which focus on fixed returns and repayment of principal, equity securities come with inherent risks and can fluctuate in value based on the company’s performance and market conditions. This ownership stake contrasts sharply with fixed-income securities that do not confer ownership or voting rights.