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What Is Equity Asset Allocation?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 03 September 2016
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Equity asset allocation refers to the process by which investors manage the amount of money put that they put into the investment securities known as equities. By purchasing equity in a company, an investor is essentially getting a portion of ownership of that company, hoping that the company's business will improve and that equity rises in value. When practicing asset allocation, investors must decide how to spread their money around to the various types of companies available to them. In doing this, they must be aware of both their short-term and long-term investment goals and the different levels of risk associated with each type of equity.

Investors who play the stock market are essentially buying ownership in the companies in which they invest. This ownership is known as equity. The value of equity rises if many investors buy the stock, and it falls if many investors sell it. In terms of the potential for big gains, equity is one of the more effective security classes available to investors. Deciding how to divvy up the money spent on different equities when buying and selling stocks is known as equity asset allocation.

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It is important to note that there are different types of equity available for equity asset allocation. Public equity is offered by those companies that trade on the stock market and is generally available to investors of all financial means. Private equity is that equity which is purchased in a privately-owned company. Such equity often affords the owner some sort of authority in the company's decision-making, but it requires a substantial investment of funds.

When deciding upon how to practice equity asset allocation, investors should understand first the different types of risks and rewards attached to each type of stocks. In general, so-called blue-chip stocks are offered by companies with a proven track record and significant impact in their specific industry. These stocks are generally pricey but often reward investors with solid returns and regular dividend payments. On the other hand, growth stocks often come from companies that are relatively new or unproven but have the potential to offer big returns if they can make an impact in their industry.

Investors choosing between these equities in the process of equity asset allocation should keep certain things in mind. They should know just what they want out of their money, whether it is long-term stability or short-term profits. In addition, they should also consider practicing diversification with the equities they choose. By spreading their investments among many sectors of the stock market and among companies with many different characteristics, investors can minimize the risk associated with a small, narrowly-focused group of stocks.

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