The World of Equities

Have you ever looked at your investment account statement and wondered, what’s the difference between mutual funds, corporate bonds, and preferred stocks? If so, you’re not alone. There are more types of investments, or asset classes, than you can count. But generally speaking, asset classes have four different categories: equities, fixed income, cash equivalents, and alternative investments.

Let’s start with equities. Equity is ownership in a company through the purchase of shares in that company. Three common types of equity investments are common stocks, mutual funds, and exchange traded funds.

• COMMON STOCKS

When you buy a share of common stock, you are purchasing a portion of a company, meaning you own part of the company’s assets, liabilities, revenues, and expenses. Therefore, you are entitled to your portion of their earnings, known as earnings per share. This ownership entitles you to elect the company’s board of directors, who, in turn, hire managers to run the business and decide on major strategies and policies. In order for a company’s stock to be publicly traded, it must first “go public” through an Initial Public Offering, or IPO. Most equity holdings in DCM’s investment strategies are common stocks. More specifically, we invest in common stocks that pay a consistently growing dividend — a portion of the earnings the Board of Directors has decided to pay in cash to each shareholder.

• MUTUAL FUNDS

A mutual fund is a pool of money collected from a group of investors to purchase common stocks. These assets are managed by a professional fund manager or team of managers, who are responsible for choosing which stocks are owned by the mutual fund. The managers follow a set of goals and guidelines spelled out in a document called the prospectus. The original idea behind mutual funds was to give smaller investors access to own a more diversified portfolio than they could afford on their own. Today, mutual funds have evolved into pools owning a variety of asset classes (fixed income, cash, and alternative investments) and often end up in portfolios with other mutual funds. In our opinion, investors become needlessly over-diversified in mutual funds, lose track of what they own, and get stuck with unanticipated tax liabilities. Unlike your DCM team, advisers using mutual funds can pass the blame for poor performance on to mutual fund managers.

• EXCHANGE TRADED FUNDS

Similar to mutual funds, exchange traded funds (ETFs) offer diversification to smaller investors by pooling funds. But instead of being managed by a money manager, ETFs are generally passively managed, tracking an index or sector of the market. ETFs are traded like stocks, whereas mutual funds can only be purchased at the end of each trading day based on a calculated price.