What you need to know about investing in equities
Equites, also known as shares, are issued by companies looking to raise cash and listed on a stock exchange.
When you buy a share, you invest in a small piece of the company issuing the equity, making you a shareholder in that firm. This means you're entitled to a fraction of the assets and to share in its successes (and failures).
People invest in shares because, broadly speaking, over the long term they have the potential to deliver a better return than cash savings. In addition, while investors can make money from share price growth, many companies also pay dividends* too, in other words they share their profits with their investors.
But investing in equities comes with risk as they can be very volatile and you could lose some, if not all, of what you invest.
What drivers affect stock prices?
Share prices are driven by basic supply and demand. Generally speaking, if demand for a particular stock outweighs supply, its price will go up and vice versa.
Demand for a particular company’s shares comes down to it prospects. For example, when a firm publishes its financial results, if it’s doing well and is expected to do so in the future, it will typically have a positive impact on its share price. On the other hand, if its outlook is less encouraging, for example if it lowers an expected dividend* payment, its stock could fall. But a host of other external factors, such as the economic climate and overall market sentiment, can and do influence prices.
Why investing should be a long term undertaking.
Overall history has generally shown that over the long term equities have done better than other asset classes, such as cash, bonds and real estate, which makes owning them attractive. Stocks can potentially act as a real driver of growth in an investor’s portfolio. Then there are possible additional perks for stockholders, such as dividends*, which provide income, profit potential and voting rights.
Given that shares can be volatile, many investors typically choose to spread and diversify their money across a wide array of stocks, thereby only risking a small percentage of their capital on each one. As a result, investing in an equity fund is the preferred route for many investors. When you invest in a fund you pool your money with other investors and a professional fund manager then invests this collective sum into a wide variety of shares.
Bear in mind that investing in equities can be a bumpy ride. With that in mind, investing in stocks should always be treated as a long-term endeavour and as such it is generally accepted that you will need a time horizon of at least five years but preferably far longer.
*A dividend is a reward paid by a company to a class of its shareholders and usually from a portion of the company’s earnings.