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Equities 101

Equities represent a major asset class. Here we explain what they represent and why they may be of interest when considering the make-up of your investment portfolio.

What are equities?

Companies often release shares as a means of raising money. Essentially, companies are selling part of their business to investors and shares offer people outside the company the opportunity to receive profits if the company is successful. Dividends are paid at the discretion of the management and board of directors. 

Why should I invest in shares?

Historically, equities have outperformed safer investments and can act as a real driver for growth in your investment portfolio. Not only is it possible to receive an income from shares, investors may also see capital growth if the company prospers and the value of each share increases.

However, investment in shares exposes you to the potential to lose some, or all, of your money. Shares are seen as one of the riskiest asset classes, so you should take extreme care when you consider investing in equities and the different types that are available.

What are the different types of share?

There are two types of company shares you can purchase:

Ordinary shares 

Buying ordinary shares makes you a part-owner of the company and entitles you to dividends. These are effectively a share of the companies’ profits that are paid out to shareholders once it has met all of its other obligations. Most ordinary shares are voting shares, meaning you also get a say on matters relating to the company, such as directors’ salaries or whether to agree to a takeover.

Preference shares

These shares carry no voting rights but, as the name suggests, entitle you to other rights. Preference shareholders usually get a share of the profits before ordinary shareholders, usually as a limited amount defined by the issuing company. 

In addition to this, preference shareholders rank higher that ordinary shareholders in the event that the company goes bust. Preference shares are generally seen as less risky and returns are therefore generally lower than ordinary shares.

What factors affect share prices?

Both internal and external factors may affect the price of your shares.

Companies publish their financial results at least once a year, as well as publishing trading updates and announcements of dividend distributions for the future. If the company is performing well and is expected to do so in the future, this should have a positive effect on the share price. Conversely, if the prospects aren’t looking good, the share price can fall.

The wider economy is also influential on the share price. If economic conditions are good and investors have confidence in companies’ ability to grow, the demand for shares increases. This market sentiment and investor demand for shares can increase the price. The more that demand outweighs supply, the higher the share price can go.

Of course, if the economic climate is not good, investors may not be so confident in the prospects of a company. Therefore, the share price can fall, even if the company is performing well.

What is a stock market index?

A stock market index is used as a way to measure the performance of shares in a particular country, region or type of industry.

In the UK, the flagship stock market index is the FTSE 100. The ‘footsie’ measures the performance of the 100 largest companies by market capitalisation listed in the UK. The larger FTSE All Share measures the performance of all listed companies in the UK.

There are hundreds of different indices measuring the performance of shares all over the world. They can be useful as a barometer or benchmark to judge the performance of your investment.

Please feel free to get in touch if you are interested in finding out more about equities and whether investing in equities is suitable for you. 

jonathan@truwealth.co.uk

0141 212 3983

*Please note when investing, there’s always the risk that your investment could fall in value as well as rise. This means you could get back less than you invested. 

Sources:

https://www.which.co.uk/money/investing/how-investing-works/asset-classes-explained/equity-funds-explained-ar7094p21dc9

https://www.investopedia.com/terms/a/assetclasses.asp

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