Equity Securities

Equity securities (also known as 'stocks' or 'shares') are financial instruments that represent an ownership stake in a corporation. Think of a company as a giant pizza. When you buy an equity security, you are buying a slice of that pizza. You become a part-owner, a shareholder, with a claim on the company's assets and earnings. Companies issue these shares to raise money—or capital—to fund their operations, expand, or launch new projects. This is often done through an Initial Public Offering (IPO), after which the shares typically trade on a stock exchange like the New York Stock Exchange or the London Stock Exchange. For a value investor, owning a stock isn't about trading a blinking symbol on a screen; it's about owning a piece of a real, tangible business. The goal is to understand that business so well that you can confidently determine what your slice is truly worth, independent of its daily market price.

Owning equities is one of the most powerful ways to build wealth over the long term. The rewards for shareholders come in two primary forms:

• Capital Appreciation: This is the profit you make when the stock's price goes up. If you buy a share for €50 and sell it later for €80, you've achieved a capital appreciation of €30. For value investors, this appreciation isn't random luck; it’s the market eventually recognizing the true, higher intrinsic value of the underlying business.
• Dividends: Many companies share a portion of their profits directly with their shareholders. These payments are called dividends. They can provide a steady stream of income, which you can either spend or, even better, reinvest to buy more shares, allowing your investment to compound over time.

For a true investor, the appeal lies in participating in the success of a great business. As the company grows its earnings year after year, the value of your ownership stake should grow with it.

Not all stocks are created equal. They generally fall into two categories, each with different rights and features.

This is what most people mean when they talk about “stocks.” As a holder of common stock, you are a true part-owner of the company.

• Voting Rights: You typically get one vote per share, allowing you to have a say in major corporate decisions, like electing the board of directors.
• Unlimited Upside: The value of your shares can grow indefinitely as the company succeeds. You have a claim on all the profits left over after the company pays its debts and other obligations.
• Higher Risk: The flip side is that you are last in line. If the company goes bankrupt, its debts are paid to creditors and preferred stock holders first. If there’s nothing left, common shareholders may get nothing.

Preferred stock is a bit of a hybrid, with characteristics of both stocks and bonds.

• Fixed Dividends: Preferred shares usually pay a fixed dividend, much like a bond pays interest. Companies must pay these dividends to preferred shareholders before any can be paid to common shareholders. This makes them a more reliable source of income.
• Priority in Liquidation: If the company fails, preferred shareholders are paid back before common shareholders.
• Limited Upside & No Votes: In exchange for this safety, preferred shareholders usually give up voting rights. Their potential for capital appreciation is also limited, as the fixed dividend is the main attraction, and the price doesn't fluctuate as dramatically as common stock.

Legendary investor Benjamin Graham taught that a stock is not just a ticker symbol; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price. This philosophy is the bedrock of value investing.

Before buying a single share, a value investor acts like a business analyst. You should ask fundamental questions:

• Does this company consistently make a profit?
• Does it have a strong balance sheet with manageable debt?
• Does it have a durable competitive advantage—what Warren Buffett calls an economic moat—that protects it from competitors?

You are not betting on market sentiment; you are investing in the long-term prospects of the business itself.

The most crucial concept for a value investor is understanding the difference between price and value.

1. Price is what you pay for a share on the stock market. It can be swayed by daily news, herd mentality, and irrational fear or greed.
2. Value (or intrinsic value) is what the business is actually worth, based on its assets, earnings power, and future prospects.

The goal is to calculate a conservative estimate of a business's intrinsic value and then wait for the market to offer you a price well below that value. That discount is what Benjamin Graham called the Margin of Safety—your protection against bad luck, bad analysis, or a downturn in the economy. Buying a great business is good, but buying it at a wonderful price is even better.