Summary of Equity Securities - Essay Example

Equity security investments that do not form the part of the trading securities are referred as available-for-sale (AFS) securities. This are reported at the fair value with gains and losses that are unrealized and are excluded from the earnings of the company. The investments made in the equity securities are recorded at the cost that takes into account securities transaction taxes, brokerage fees and other costs that are related to the procurement of securities (Subramani 12). The investors invest in the company shares hoping to receive higher return on their cash outflows.

The demand of the investors in the financial markets has invariably changed with the passage of time. The companies motivate these investors by providing higher future expected returns on the assets (equities). The equity securities and its features differ in case of different types of companies. The types of companies and the features of stocks are explained henceforth (Fabozzi 6-7). Defensive companies have the ability to withstand the economic downturn and the future earnings are not affected.

Hence, the business and financial risk is low in this case. Examples of such defensive companies are grocery chains or public utilities, which aims at providing its customers with necessity products. The rate of return of defensive stocks does not decline when there is an overall market decline. According to the Capital Asset Pricing Model (CAPM), the relevant risk of an asset has covariance with the market portfolio of risky assets. Hence, stocks with negative or low systematic risk (beta value) are considered as defensive stocks according to the theory of CAPM; the stock returns are not affected by the significant changes in a bear market (Scott 102).

The earnings and sales of cyclical companies are significantly influenced by business activities. Examples of these