Equities
Investing in equities involves purchasing shares in companies listed on a stock exchange. A share signifies a small ownership stake in that company. Equities are typically regarded as a higher-risk, higher-reward asset class suitable for long-term investment objectives.
Potential benefits from owning equities are twofold:
- Capital growth: If the company performs well and its value increases, the price of its shares may rise. Selling your shares for more than you paid results in a capital gain.
- Dividends: Some companies pay a part of their profits to shareholders. These payments, known as dividends, are not guaranteed and can be reduced or stopped at any time.
Understanding risk and volatility
Although equities have traditionally offered greater growth potential than cash savings or bonds, they also carry higher risk. Share prices can be volatile, meaning their value can fluctuate both up and down, sometimes quite significantly. It is possible to lose money, including your entire initial investment.
Several factors can influence share prices, including:
- Company performance: The company's profitability, debt levels, and future prospects.
- Economic factors: Changes in interest rates, inflation, and overall economic health.
- Market sentiment: Investor confidence and broader market trends.
- Geopolitical events: Political instability or global events can create market uncertainty.
Approaches to equity investing
Investors can access shares in various ways, such as purchasing stocks in individual companies directly. A common alternative is to invest through collective investment funds (like unit trusts or OEICs), which pool money from many investors to buy a broad range of shares. This method helps to achieve diversification, spreading risk across different companies, sectors, and regional areas.
These funds can be managed actively, with a fund manager selecting stocks to try and outperform the market, or passively, where the fund simply follows a market index like the FTSE 100. For tax efficiency, equities can be kept within wrappers such as Individual Savings Accounts (ISAs) or pensions.
It is vital to understand the risks involved, which include market risk (the entire market declining), company-specific risk (one company performing badly), and currency risk when investing in overseas shares.
THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.
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