Variable income

What is a variable income?

Equity is the set of debt financial assets issued by States, agencies, public and private entities, to offer the policyholder a variable profit as compensation for the investment made.

This is made up of various titles such as stocks, mutual funds and bonds, its superior profitability to that obtained in fixed income placements, since it is considered a riskier investment.

Types of equities

The main equity instruments are the following:

• Actions: the investor who acquires them becomes a partner that owns a part of the company and expects to obtain returns through the receipt of dividends or by selling their shares to another investor, at a higher price.
• Bonds: These variable income debt securities can be issued by a public (government) or private (company) entity to finance its activities. They are usually traded on a stock exchange. The issuer agrees to return the principal capital together with the interest.
• Foreign exchange- Buying / selling currencies can be considered an equity investment, as the investor can earn a variable profit by buying and selling various currencies on the foreign exchange market.

Advantages and disadvantages of equities

Advantage

The benefits of equities are as follows:

• Equity investments generate a higher profitability compared to fixed income operations.
• Invest in the equity market does not require large outlays of money.

Disadvantages

The downsides of equities are as follows:

• Unlike fixed income investments, performance unknown. For example, in the case of stocks it is difficult to determine their profitability, since this does not depend only on the management of the company itself but also on external factors such as inflation, market developments, etc.
• In general, they do not have a maturity period, so the investment is exited by selling the equity interest.
• They are considered investments of high risk by the degree of uncertainty associated.
• It may take a while for the investor to sell the debt securities or shares, so they are not considered liquid assets.

Equity example

Suppose that a company requires financing to build a new production plant and wants to do so through the sale of shares, instead of requesting a loan from financial institutions. He then decides to sell 1,000 shares at a par value of $ 500 each.

Investors believe that the company will increase its current profits after the construction of the new plant, so they buy all of the shares offered.

A few months later, the company closed an important export business thanks to the expansion of its production capacity. The share price rose to $ 650, given the interest the company aroused in the stock market. Thus, some investors who bought US $ 500 per share decided to sell it for a very good profit (US $ 150 per share).

In this case, buying stocks is an equity investment.