How to distinguish between equity securities, debt securities, and stocks for beginners

When it comes to investing, novice investors often confuse equity securities with debt securities and stocks, wondering how they are similar or different. This article will help you clearly understand the differences so you can make informed investment choices.

Debt Securities vs. Equity Securities: Who is the Owner, Who is the Creditor

The most important difference is the investor’s status.

Debt securities make you a creditor of the company. You lend money to the company, which is obliged to pay you interest at a predetermined rate, regardless of whether the company makes a profit or incurs a loss. Debt securities such as bonds, debentures, and promissory notes carry low risk because they provide regular returns.

Equity securities make you an owner of the business in proportion to your shareholding. You have rights to the company’s profits in the form of dividends, but you also accept the risks of business operations. If the company faces difficulties, you may not receive dividends or the stock value may decrease.

Risks and Returns: An Important Relationship

Debt securities have low risk and low but steady returns, suitable for risk-averse investors. Equity securities carry medium to high risk, but also offer the potential for higher returns.

Comparison examples:

• Government bonds: issued by the Ministry of Finance or government agencies, with the lowest risk and lowest returns.
• Private sector bonds: bonds and debentures from private companies, offering higher returns but increased risk.
• Equity securities: common stocks, preferred stocks, and warrants, which can yield very high returns but also come with higher risk.

Stocks are a Type of Equity Security

Stocks are financial documents representing ownership in a company. Stockholders have rights to dividends and voting at shareholder meetings. Stocks are divided into small units called “shares,” making it easier for the general public to access investment.

Common Stock: Stockholders have voting rights and receive dividends. In case of company liquidation, common stockholders are paid after creditors and preferred stockholders.

Preferred Stock: Stockholders receive fixed dividends as specified, but do not have voting rights. However, in bankruptcy, preferred stockholders are paid before common stockholders.

Additionally, there are Warrants, which give holders the right to buy shares at a predetermined price. Warrants are higher-risk instruments.

Equity Market Structure: Where to Buy and Sell Stocks

Primary Market: where companies issue new securities to raise funds, divided into:

• Private Placement (PP): offering to a limited number of investors, not exceeding 35 people, within 12 months, or to financial institutions.
• Public Offering (PO): offering to the general public, requiring approval from the Securities and Exchange Commission (SEC).

Secondary Market: where investors buy and sell securities among themselves, divided into three types:

• Thailand Stock Exchange (SET): for large companies with paid-up capital of at least 300 million baht.
• MAI (Market for Alternative Investment): for medium and small businesses with paid-up capital of at least 20 million baht.
• Over-the-Counter (OTC): direct transactions between buyers and sellers.

Equity Securities and Mutual Assets: When Multiple Investors Collaborate

Mutual Fund Securities involve pooling money from many investors to create a diversified investment portfolio managed by a professional Fund Manager.

Advantages:

• No need for deep market knowledge; professional management.
• Ability to invest in various instruments like stocks, bonds, and other securities according to the fund’s objectives.
• Diversification reduces risk from direct investments.
• Investors receive Units proportional to their share, with the value depending on the total assets of the fund.

Benefits and Risks of Equity Securities

Benefits:

1. Benefit from the expertise of fund managers in selecting assets and managing portfolios.
2. Ability to invest in various types, from common stocks, preferred stocks, to Derivative Warrants (DW).
3. Receive returns in the form of dividends or capital gains.
4. No need to monitor the market closely; convenient to buy and sell units.
5. Potential for higher returns compared to debt securities.

Risks:

• Price risk: prices of common stocks and preferred stocks can fluctuate with market trends.
• Business risk: operational performance of issuing companies.
• Dividend payment risk: companies may not be profitable enough in some years.
• Macroeconomic risk: economic, political situations, and unforeseen events.

Comparison Table of Securities Types

Investment Strategies in Equity Securities

When deciding to invest in equity securities, investors should have a clear plan:

1. Study the Business Before Investing: analyze the stability and growth prospects of the company, whether investing small or large amounts.
2. Set Return Goals: decide how much return you want and how much risk you are willing to accept.
3. Diversify Your Portfolio: avoid putting all your money into a single security.
4. Regularly Evaluate Investments: review every 3-6 months and adjust your portfolio according to the situation.

Summary: Choose Securities That Suit You

Debt securities are suitable for investors seeking steady returns and low risk. Equity securities and stocks are suitable for those willing to accept higher risks for higher returns.

Most importantly, clearly assess your financial situation, understand the risks, and study thoroughly before investing in any securities. This is the formula for smart investing with sustainable capital growth.