Equity means ownership. As the holder of an equity investment, you participate in the profit and loss of the underlying entity. There is no guaranteed return on equity investments. If the company is profitable, and is thought to be a good investment by other investors, the value of the stock goes up. If the company is not profitable or is not regarded as a good investment by the markets, your investment goes down. Although equities involve a certain amount of risk, over the last century, they have proven to be the best-performing long-term investment vehicle. Listed below are a few different types of equity investments.

STOCKS

A share of a stock represents an ownership interest in the issuing company. Stockholders own a portion of the issuing company and participate in its profits and growth. Stocks are categorized by their “market capitalization.” Market capitalization is the number of outstanding shares of a company multiplied by the share price. Companies with a capitalization under one billion dollars are generally considered “small cap” stocks. Companies with assets of between one and ten billion dollars are “Mid cap” stocks, and companies with assets in excess of ten billion dollars are “large cap” stocks. Historically, large cap stocks have tended to be older, more stable companies. The most desirable “blue chip” stocks continue to be older large cap stocks with a consistent track record of profitability such as IBM, Wal-Mart, General Motors, etc.

MUTUAL FUNDS

Mutual funds offer you the opportunity to own a variety of stocks and bonds through a single investment. A professional money manager oversees the fund and makes investment decisions. Your choices are dizzying, with well over 12,000 mutual funds from which to choose. Interestingly, there are more mutual funds than there are individual publicly traded stocks!

Each mutual fund has its own investment philosophy, which must be clearly defined in the fund’s prospectus. For example, a growth fund must invest primarily in stocks. A capital preservation fund must invest primarily in certificates of deposit. Balanced funds may invest in a variety of securities such as stocks, bonds, and international securities, while maintaining a cash reserve for flexibility. The key is to purchase quality funds that match your risk tolerance and investment objectives.

The first step in evaluating a fund is to compare it against the track record of similar funds over a designated period, usually the last 3 and 5 years. Although past performance is no guarantee of future results, it is the best available indicator (unless you have a crystal ball). You can find this information in the fund’s prospectus.

A much more accessible source of performance information is Morningstar, which ranks mutual funds in a number of categories using a one-to-five-star rating system. You can find these rankings in the reference section of your library. Morningstar’s web site, http://www.morningstar.com also has a wealth of data designed for novice as well as experienced investors.