Equities in the stock market are ownership shares in a company, bought and sold as stock on public exchanges. When you own an equity, you hold a fractional claim on that company’s profits and, if it is ever wound down, on whatever assets remain after every creditor has been paid. The word “equities” and the word “stocks” describe the same thing.
That ownership carries specific legal rights, specific tax consequences, and real risk of loss. What those rights look like, and how much risk you take, depends on the class of shares you hold and the company that issued them.
What Owning a Share Actually Means
A share is a slice of a corporation. When a company incorporates, its charter authorizes a set number of shares it can sell. If a company authorizes 1,000,000 shares and you buy 10,000, you own 1% of its equity.
Two documents define what that 1% actually entitles you to. The charter, filed with a state agency at incorporation, sets out how many shares the company can issue and what classes of stock exist. The bylaws describe how the company is governed, including voting procedures and the roles of directors and officers. Together they determine the practical meaning of your ownership.
Companies sell equity instead of borrowing because it raises capital without adding debt. For the buyer, it offers a share in future growth with no guarantee of return. You can lose what you paid.
Types of Equities
Common Stock
Common stock is the standard form of equity. It carries voting rights on corporate decisions and gives you the full upside if the share price rises. Common shareholders are the residual owners of the business, which sounds prestigious until you notice that “residual” means paid last when things go wrong.
The upside on common stock is theoretically unlimited. If the company triples in value, so do your shares. The downside is capped at what you paid, since you cannot lose more than your investment. Common stock may or may not pay dividends, depending on whether the board chooses to distribute profits or reinvest them.
Preferred Stock
Preferred stock sits between common stock and bonds. Preferred shareholders receive fixed dividend payments that must be paid before any dividends reach common shareholders. If the company goes bankrupt, preferred holders are paid before common holders when remaining assets are distributed.
The trade-off is that preferred stock usually carries no voting rights and limited upside. The price does not climb as much when the company thrives, because the dividend is fixed. It behaves more like a bond with an equity label, which suits investors who want steady income rather than growth.
Dual-Class Structures
Some companies issue two or more classes of common stock with different voting power. A typical dual-class structure gives one class ten votes per share and the other one vote per share. A few companies have gone as far as a 20-to-1 ratio. Founders and insiders usually hold the super-voting shares, which lets them keep control after selling a majority of the economic interest to the public. The structure is common among tech companies that went public in the last two decades.
Convertible Preferred Stock
Convertible preferred shares begin as preferred stock but can be exchanged for a set number of common shares. The conversion ratio is fixed at issuance. A 4:1 ratio means each preferred share converts into four common shares. You get the safety of preferred dividends with the option to switch into common stock if the share price rises enough to make conversion worthwhile.
Rights That Come With Your Shares
Voting
Common stock gives you a voice in how the company is run. Shareholders vote to elect the board of directors, approve mergers, and amend the corporate charter. Votes are typically proportional to share count: 500 shares means 500 votes. Most shareholders do not attend annual meetings in person and instead vote by proxy, submitting their choices ahead of time.
Director elections usually require only a plurality of votes cast, so the candidate with the most votes wins even without a majority. Bigger decisions like mergers usually carry a higher threshold.
Dividends
When a company earns a profit, its board can distribute some of that profit to shareholders as a dividend. These payments are not guaranteed. The board decides how much to pay and when. Preferred shareholders receive their fixed dividends first, and whatever the board allocates beyond that goes to common shareholders. Some companies pay quarterly, some annually, and many pay nothing at all, preferring to reinvest.
Liquidation Priority
If the company goes bankrupt and its assets are sold off, federal law dictates a strict payment order. Secured creditors get paid first, followed by unsecured creditors in a priority order set by statute, then general unsecured claims. Equity holders are last. Under 11 U.S.C. ยง 726, any remaining property goes “to the debtor” only after five higher-priority categories of claims have been fully satisfied.1Office of the Law Revision Counsel. 11 USC 726 – Distribution of Property of the Estate
In practice, equity holders in a bankruptcy rarely recover anything. Bondholders and creditors absorb whatever value remains. That is the flip side of holding the residual claim. You get the full upside, and you bear the most risk if the company fails.
How Equities Are Bought and Sold
The Primary Market
When a company sells shares to the public for the first time, it does so through an initial public offering in the primary market. Federal law prohibits selling securities to the public without first registering them with the Securities and Exchange Commission.2Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails The company files a registration statement using Form S-1, which includes a prospectus with detailed disclosures about the business, its finances, risk factors, and management.3SEC. What Is a Registration Statement? The money from these newly issued shares goes directly to the company.
The Secondary Market
After the IPO, shares trade between investors on exchanges like the New York Stock Exchange and Nasdaq. This is the secondary market, and it is where the vast majority of stock trading happens. The company itself receives no money from these transactions. When you buy shares of Apple on an exchange, you are buying from another investor who decided to sell.
The Securities Exchange Act of 1934 governs secondary market trading. It requires public companies to file periodic financial disclosures, including annual reports on Form 10-K and quarterly reports on Form 10-Q, and it contains anti-fraud rules that prohibit practices like insider trading.
Settlement
A trade does not settle instantly. Since May 2024, the standard settlement cycle for U.S. securities has been T+1, meaning the actual transfer of shares and cash happens one business day after the trade date.4SEC. SEC Chair Gensler Statement on Upcoming Implementation of T+1 Settlement Before that, the cycle was two business days. Federal regulations codify the rule and prohibit brokers from entering contracts that settle later than T+1 unless the parties expressly agree otherwise.5eCFR. 17 CFR 240.15c6-1 – Settlement Cycle
How Your Shares Are Held
Street Name and Direct Registration
Most investors never see a stock certificate. When you buy shares through a brokerage, those shares are typically held “in street name,” meaning they are registered under your broker’s name while the broker’s internal records show you as the real owner. It makes buying and selling fast, but the company’s own books do not show your name.6FINRA.org. Know the Facts About Direct Registered Shares
The alternative is the Direct Registration System, where shares are registered in your name on the company’s books through its transfer agent. You receive account statements, dividends, and proxy materials directly from the company or transfer agent. The trade-off is speed. Selling DRS shares requires transferring them to a broker first, which takes time. Issuers and transfer agents generally do not charge for direct registration, though fees may apply if you move shares between DRS and street name.6FINRA.org. Know the Facts About Direct Registered Shares
Fractional Shares
Many brokerages now let you buy a fraction of a share, so you do not need $500 to buy a stock trading at $500. Fractional ownership is convenient, but not all brokerages grant voting rights on fractional shares, and policies vary by firm. If proxy voting matters to you, ask your broker before buying fractional positions.7FINRA. Investing in Fractional Shares
SIPC Protection
If your brokerage firm fails financially, the Securities Investor Protection Corporation covers up to $500,000 per customer in missing securities and cash, with a $250,000 sublimit on cash.8SIPC. What SIPC Protects SIPC replaces missing stocks and cash when a broker goes under. It does not cover losses from investments that declined in value, and it does not cover bad investment advice.
Taxes on Equities
Capital Gains
When you sell stock for more than you paid, the profit is a capital gain, and you owe tax on it. How much depends on how long you held the shares. Gains on stock held for more than one year are taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, a single filer pays 0% on long-term gains if taxable income is $49,450 or less, 15% up to $545,500, and 20% above that. Married couples filing jointly hit the 15% rate above $98,900 and the 20% rate above $613,700.
Stock sold within one year of purchase generates a short-term capital gain, taxed at your ordinary income tax rate. The gap between the two is large enough that holding shares for at least a year and a day can meaningfully change your after-tax return.
High earners face an additional 3.8% net investment income tax on top of capital gains rates. It applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.10Internal Revenue Service. Net Investment Income Tax
Qualified Dividends
Dividends from most domestic stocks are taxed at the same favorable rates as long-term capital gains, provided you meet a holding period test. To qualify, you must have held the stock for at least 61 days during the 121-day period that starts 60 days before the ex-dividend date.11Internal Revenue Service. Instructions for Form 1099-DIV Dividends that fail the test are taxed as ordinary income. For preferred stock with dividend periods longer than 366 days, the required holding period is 91 days within a 181-day window.
The Wash Sale Rule
If you sell stock at a loss and buy the same stock, or something substantially identical, within 30 days before or after the sale, the IRS disallows the loss deduction. The 30-day window runs in both directions, so repurchasing even the day before a loss sale can trigger it. The disallowed loss gets added to the cost basis of the replacement shares, so the deduction is not lost permanently; you just cannot use it until you sell the replacement shares.12Internal Revenue Service. Publication 550 – Investment Income and Expenses The rule also applies if your spouse or a corporation you control buys the substantially identical stock, and it extends to purchases within an IRA or Roth IRA.13Office of the Law Revision Counsel. 26 USC 1091 – Loss from Wash Sales of Stock or Securities
What Moves Share Prices
Share prices reflect supply and demand. When more people want to buy a stock than sell it, the price rises. When sellers outnumber buyers, it falls. What drives those decisions is more complicated.
Earnings reports are the most direct driver. Public companies file quarterly reports with the SEC detailing revenue, expenses, and profit. Investors compare actual results against expectations, and the gap between the two often matters more than the raw numbers. A company can report record profits and still watch its stock drop if those profits fell short of what analysts predicted.
Broader economic conditions ripple through every stock. Interest rate changes by the Federal Reserve affect how investors discount future corporate earnings and how attractive stocks look relative to bonds. When rates rise, the risk-free return from government bonds increases, and stocks have to offer more potential return to compete. GDP growth, employment data, and inflation reports all shape expectations about whether corporate profits will rise or fall.
Company-specific events matter too. A new product launch, a lawsuit, a change in management, or a regulatory decision can shift a stock’s trajectory regardless of what the broader market is doing.
Risks of Owning Equities
Equities offer higher long-term return potential than bonds or savings accounts, and that potential comes with real risk. No return is guaranteed, and you can lose some or all of what you invested.
Market risk affects all stocks. Economic downturns, financial crises, and geopolitical events can drag down the entire market regardless of how well individual companies are doing. You cannot diversify this away by owning more stocks, because the risk applies to the market as a whole.
Company-specific risk is the chance a particular business underperforms or fails. A product recall, an accounting scandal, or losing market share to a competitor can devastate a single stock’s price even while the broader market rises. A portfolio spread across many companies reduces this risk because one failure does not sink the whole account.
Inflation risk is subtler. If your stock portfolio returns 5% in a year when inflation runs at 6%, your purchasing power actually declined despite the nominal gain. Stocks have historically outpaced inflation over long periods, but there are stretches where they do not, and those stretches can last years.
Liquidity risk is the possibility that you cannot sell your shares quickly at a fair price. Stocks of large, well-known companies trade millions of shares a day with very narrow gaps between what buyers offer and what sellers ask. Smaller, thinly traded stocks can have wide gaps between those prices, meaning you may have to accept a worse price to get out of your position. The size of that gap is one of the most reliable signals of how liquid a stock is.