Last Updated on 23, March 2014
In accounting term, equity refers to the portion which a shareholder is entitled to in a company. The equity of a company is Assets less liabilities. Equity is also equal to Retained Earnings at the beginning of the period + Income + Other comprehensive Income - Dividends paid in that period.
In investment terminology, equity refers to investing in stocks. Because stocks are traded on the stock exchange, its stock price is often subjected to the demand and supply factor.
The risk of equity investments are:
- Market risk (i.e. when the equity market is in general downward direction, most stocks will also move in the similar direction)
- Liquidity risk (i.e. some stocks are thinly traded and hence difficult to buy or sell)
- Non-systematic risk (i.e. company's insider trading, fraud, mismanagement, etc)
For equity portfolio, we mean investing in a basket of many stocks either usually through a fund. By investing in a large basket of stocks, non-systematic risk can be eliminated and the remaining systematic risks remain.
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