The importance of equities

Equities let you own a share of a company

Equities (or stocks and shares) play an important part in most people’s investment portfolios. That’s because they have the potential for higher returns over longer periods than most other types of investments.

When you buy equities, you’re becoming a part-owner of the company you’re buying from. You become a shareholder.

You can buy and sell shares from companies that are publicly listed on a stock exchange. However, some companies have privately held shares that aren’t available for everyone to buy.

Why choose equities?

If you choose to buy shares in a company, you could benefit from some of the company’s profits. This is based on how many shares you hold. Of course, this can work the other way too. If a company is doing badly, you could see your investment fall in value.

Equities can make you money in two ways. But remember, neither is guaranteed:

1. Capital

If a company’s share price goes up and you sell your shares, you make money, as they’re now worth more than you paid for them. This is known as capital growth.

2. Income

Many companies (particularly large, well-established companies) pay part of their profits to shareholders as an income - known as dividends. 

In most cases, the company directors choose if and how much they will pay out each year. A decision to not pay could do them more harm than good. For example, it might suggest that the business is having problems and lead to a drop in share price. If you hold preference shares (also known as preferred stock), you’re guaranteed a fixed rate of dividend.

 

 

It's not all about growth - equities can be risky too

Historically, equities have performed better than some of the ‘safer’ investments such as bonds and money market-type investments over the long term. So, if managed correctly, equities can help the value of your investment portfolio grow significantly.

But with this potential for greater growth comes greater risk.  Equities can be volatile, meaning their value can go down or up sharply at any time.  So when you sell shares, you could get back less than you paid for them.

Equities in different market sectors and countries can perform in different ways at different times. So it’s worth thinking about holding a range of equities, and as part of a wider portfolio of other investments.

How to invest in equities

You can buy and sell shares directly yourself, but it can be risky to have all your money in only a small number of companies.

Instead, many people choose to invest through funds. That way your money is pooled with other people’s money to buy a range of equities. You can also choose funds which include a range of investments, not just equities.

And there’s the added benefit of having an experienced fund manager invest and manage your money for you.

Find out why it can be a good idea to have a diversified range of investments in our helpful guide.

Share prices can change, sometimes quite considerably

Here are some of the reasons that share prices can move down as well as up, sometimes quite considerably:

1. Supply and demand

Share prices might go up if a lot of investors want to buy shares in a company, but there aren’t many shareholders looking to sell. The price might go down if more shareholders want to sell than investors want to buy.

2. A company's performance

In the UK, publicly listed companies have to publish their financial results twice a year. They also have to make what are known as ‘regulatory announcements’ if, for example, they launch a new product or there’s a takeover bid. 

As investors use this information to help decide whether to buy or sell shares, this can affect supply and demand and, in turn, share prices. Reports from external research analysts can also increase or decrease demand for shares in a particular company, and affect the share price.

3. Economic environment

Companies are more likely to perform well in a healthy economy, leading to increased investor confidence and demand, and rising prices. On the other hand, weak economic conditions may see even the strongest businesses struggle. As a result, a drop in investor confidence and demand could lead to falling prices.

This information is to help you understand more about equities, how they work and why you might want to invest in them. Please remember though that the information here shouldn’t be regarded as financial advice.